Thank you to Avraham Deutsch’s office for authoring this article.

In July 2005, the Israeli Knesset finally passed legislation concerning the taxation of trusts, effective January 1st, 2006.

What is a trust?  Someone (Grantor/Settlor) can create a trust by signing a trust deed in which he transfers legal title of his assets to a trustee, whom he designates in the trust deed.  The trustee, while having legal title to the assets, has no beneficial entitlement from the assets.  The trust deed names beneficiaries, who do not have legal title to the assets, but are able to enjoy the income and the assets in accordance with the terms and conditions under the trust deed.

The new Israeli law recognizes three different types of trusts:

  1. Israeli resident grantor/settlor trust with Israeli beneficiaries.
  2. Foreign resident grantor/settlor trust with Israeli beneficiaries.
  3. Israeli resident grantor/settlor trust with foreign beneficiaries.
  1. Israeli resident grantor/settlor trust with Israeli beneficiaries: Israel ignores the trust as a legal entity in this particular case and taxes either the grantor or the beneficiaries. For those of you who previously created such a trust, as of January 1st, 2006, the income from these trusts will be subject to Israeli tax.
  2. Foreign resident grantor/settlor trust with Israeli beneficiaries: To the extent that the grantor/settlor is a foreign resident at creation of the trust and remains so, all foreign source income of the trust will not be taxable in Israel, even when a distribution is made to the Israeli resident beneficiaries on the condition that the beneficiary does not have any undue influence on the management of the trust.  If the foreign grantor should move to Israel and become a resident, the income from the trust will be subject to tax as if it was in the name of the grantor, but it will enjoy the exemptions that a new resident is entitled to.

Please see below the major changes to this trust as of January 1, 2014.

  1. Israeli resident grantor/settlor trust with foreign beneficiaries: This type of trust can avoid paying Israeli tax on its foreign source income if the Israeli resident grantor/settlor is prepared to give up all control over the assets and income. The trust must be irrevocable and the grantor and no other Israeli resident can or ever have rights or control over the assets or the income.  However, the transfer of the assets other than cash to such a trust, will be treated under Israeli law as a sale of the assets which will be subject to capital gains.

 

On July 30, 2013, the Knesset approved a new bill which is referred to as the Law for the Change of National Priorities (“the New Law”). The bill includes also major changes in the taxation of trusts in Israel.

The effective date of all the changes is January 1, 2014.

The major changes are as follows:

Israeli beneficiary trust: Such trust is defined as a trust that was settled by all foreign residents upon creation of the trust and at least one Israeli beneficiary exists in the trust as well as all settlors are still foreign beneficiaries during the relevant tax year.

An Israeli beneficiary trust may be considered a “Relative Trust” if the following conditions exist:

The settlor is the parent, grandparent, spouse, child or grandchild of the beneficiary; or the second is a second degree relative of the beneficiary (a sibling) provided that the assessing officer is convinced that the trust was formed in good faith and the beneficiary did not make a contribution related to his entitlement to the trust assets.

If such trust is considered a “Relative Trust”, the trustee has to submit the election to the Israeli Tax Authorities within 60 days upon the establishment of the trust in order to choose the tax rate the trustee decides to be taxed on trust income.

The new law offers two tracks of taxation for such trust as follows:

The deferred tax option: Under this track, the trust chooses to have the beneficiary pay taxes upon distribution at 30%.

The yearly income track: The trustee chooses to be taxed at 25 % on a yearly basis on trust income which is allocated to an Israeli beneficiary. Under this election, any distributions will be exempt from tax.

Upon death of the settlor of a “Relative Trust”, the trust becomes an Israeli resident trust and is subject to tax in Israel on its worldwide income. However, if the spouse of the settlor is still alive, the trust keeps the status of a “Relative Trust”.

The change from a “Relative Trust” to an Israeli beneficiary trust occurs when all foreign settlors die.

Taxation of Trusts Settled by New Immigrants

Under the current law, a trust that was settled by a new immigrant gets the same exemption benefits to which a new immigrant is entitled to on his personal income (10 year exemption). However, under the current law, trusts that have been settled by new immigrants who arrive to Israel after August 1, 2013, will be subject to the new immigrant exemption benefits only if all beneficiaries of the trust are new immigrants or foreign residents and as long as the settlors are still alive.

If you should have any questions about the above, please call our office.

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If you should have any questions about the above, please call our office.

Alan (Avraham) Deutsch is a CPA, with over 30 years’ experience. Alan and his associates specialize in income tax planning and compliance as well as in investment consulting.
Alan has five office locations and can be reached at 02-999-2104, 03-527-3254, 09-746-0623 or 052-274-9999, or you can e-mail him at alan@ardcpa.com. Please visit his website at www.ardcpa.com for more information.