Israeli new Tax Rules Proposed – Part I
 

Economic Arrangements Bill|Foreign Resident|Trust|tax exemption 

Dr. Avi Nov, Adv.

May, 2013


The Israeli government is planning to change certain tax rules in order to close loopholes and make tax planning more difficult. Following are the new rules that are proposed in the 2013 Economic Arrangements Bill. 
See also: Israeli new Tax Rules Proposed – Part II 

A. New rules for returning residents

Some of the changes in the 2013 Economic Arrangements Bill are relevant to returning residents and new immigrants, as follows: 

1. Disclosure Rules - New immigrants and senior returning residents enjoy a 10-year exemption from Israeli tax on foreign-source income and gains. Under the current law new immigrants and senior returning residents do not need to report their exempt income. However, the Economic Arrangements Bill proposes that they will have to report income and overseas assets. This proposal is a result of pressure from the OECD’s Global Forum on Transparency and Exchange of Information

2. CFC Rules - New immigrants and senior returning residents that are shareholders in a Controlled Foreign Corporation (CFC) or a foreign professional corporation (FPC), can be used under current tax law to avoid Israeli tax liability for other regular Israeli residents. However, the Economic Arrangements Bill proposes to ban to tax planning strategy. 

3. Trust - under current tax law, if a settlor in a trust moves to Israel and became an Israeli resident, the trust enjoys a 10-year exemption from Israeli tax on foreign source income. Yet, the Economic Arrangements Bill proposes to discontinue this tax exemption for the trust if all the settlors die during the 10-year period. 

B. Foreign Resident Settlor Trust

The Economic Arrangements Bill proposes limitations on the Foreign Resident Settlor Trust. The Foreign Resident Settlor Trust is a trust where upon formation and in the tax year concerned, all the settlors are foreign residents or all the settlors and beneficiaries are foreign residents. 

The Foreign Resident Settlor Trust can avoid all Israeli tax and reporting if the trust derives all its income and gains outside Israel and distributes cash (but not assets) to family in Israel. 

There are various changes that are now proposed in the Economic Arrangements Bill, as follows:

  • Israeli resident beneficiary - If there is an Israeli resident beneficiary in the Foreign Resident Settlor Trust, the trustee will need to choose between paying ongoing Israeli tax at a rate of 25% on any trust allocation to the beneficiary or at a rate of 30% upon any distribution to the beneficiary.
  • Death of a settlor – If the settlor in a Foreign Resident Settlor Trust dies, it is proposed to attribute trust income and assets to the beneficiaries. In a case, the beneficiary is an Israeli resident, the trust will become a taxable Israeli Residents Trust and there will be a setup in the assets at their value as on the date of change. However, assets can be allocated to foreign resident beneficiaries and may get away from Israeli tax.
  • Disclosure - the Economic Arrangements Bill proposes to require disclosure from beneficiaries of all trust distributions. 

C.  Underlying Companies of a Trust

The 2013 Economic Arrangements Bill proposes to require Israeli underlying companies (which are exempt from Israeli tax on foreign-source income and gains in certain circumstances) to be owned 100 per cent by the trustee and to register with the Israeli Tax Authority within 30 days after registering the company.



 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

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