According to new Israeli tax rules, from January 1, 2014, the Israeli Tax Authority will start taxing any trust anywhere in the world that has an Israeli resident beneficiary. It is likely that many previously Israeli tax exempt trusts will be subject to significant Israeli income tax liability.
A trust is a legally binding agreement which, the settlor contributes assets to a trustee to administer for the benefit of beneficiaries. Beginning in 2006, Israel adopted a comprehensive new tax regime for trusts. From 2006 to 2013, trusts originated by foreign residents in favor of Israeli resident beneficiaries were usually untaxed by the Israeli Tax Authority, unless the beneficiaries exercised control or influence over the trust.
Under the new 2014 Israeli tax rules, if the settlor or his spouse still alive, and related to the beneficiary, Israeli Tax Authority will impose tax at a rate of 30% of income distributed to beneficiaries. Alternatively, it will be possible to pay 25% on annual trust income, regardless of distributions.
In the earlier law, Israeli beneficiaries had to report distributions in kind, not cash. However, according to new Israeli tax rules, beneficiaries should report all trust distributions. An exemption applies to new immigrants and senior returning residents who enjoy a 10-year Israeli tax holiday regarding overseas income, gains and asset reporting.
If the settlor and his spouse are not alive, the trust will turn into an “Israeli residents trust” and will need to pay Israeli tax at rates of between 30%-52% of the cannual trust income. In such case, the trustee must report and pay the tax. The Israel Tax Authority is likely to publish in the coming weeks a new tax ruling procedure for trusts.
Dr. Avi Nov Law Offices, Israeli & international tax law
*This article is intended for informative purposes only and is in no way to be construed as tax advice or a legal opinion