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.