Changes in Israeli Taxation of Trusts
Beneficiary|Trust| Foreign Resident|Settlor
Dr. Avi Nov, Adv.
June, 2013
New Israeli tax law proposes to tax any trust with an Israeli resident beneficiary. Such trust is called: Israeli Resident Beneficiary Trust. In addition, various changes are proposed in the new legislation to the Foreign Resident Settlor Trust. See: The Israeli 2013 Economic Arrangements Bill
The following describes the main changes that are proposed in the new tax legislation by the Israeli Tax Authority:
Israeli Resident Beneficiary Trust
The new Israeli legislation proposes a new category of trust – the Israeli Resident Beneficiary Trust defined as a trust in which:
(1) Every settlor is a foreign resident at the time of formation and in the tax year;
(2) There is at least one Israeli resident beneficiary in the tax year
(3) The settlor is a first degree relative of the beneficiary (such as spouse), or the settlor is a second degree relative of beneficiary (such as grandparent) and the Assessing Officer is satisfied that the trust was formed in good faith, and that the beneficiary did not provide services in consideration for his/her “entitlement” to trust assets.
The Israeli tax due
In an Israeli Resident Beneficiary Trust, the trustee will have to choose between two alternatives: paying 25% tax on trust income if it is allocated to the Israeli beneficiaries, or 30% tax on distributions to an Israeli resident beneficiary. If the trustee fails to make the above election, he will be deemed to have elected that the trust be taxed on the actual distributions.
To qualify for the 25% tax rate, the trustee and beneficiary will have to jointly notify the Israel Tax Authority of the income allocation within 30 days after formation of the trust or after adding an Israeli resident beneficiary. The notification is irrevocable so long as the Israeli Resident Beneficiary Trust has an Israeli resident beneficiary (not necessarily the same one).
The 30% tax will apply unless the beneficiaries or the trustee can prove that the source of any part of the distribution is the funds of the settlor. In the case in which the distribution includes both a capital component and an income component, the distribution will first be classified as a distribution of income and afterwards as a distribution of the capital.
Foreign Resident Settlor Trust
If a Foreign Resident Settlor Trust becomes an Israeli Resident Beneficiary Trust after a beneficiary became a new resident or a senior returning resident, the beneficiary’s income will be eligible for the 10-year tax exemption for foreign source income and gains. Under the present law, an indefinite Israeli tax exemption applied to foreign resident settlor trusts. The exemption decreased to 10 years if the settlor made Aliya to Israel.
Beneficiaries' reporting obligations
According to the present law, in a Foreign Resident Settlor Trust, an Israeli beneficiary who receives a distribution of cash from a trust is not required to report this distribution to the Israel Tax Authority. Only a beneficiary who receives a distribution in kind is required to report the distribution.
However, according to the new Israeli legislation, an Israeli beneficiary who receives any distribution (in kind or cash), will be required to submit a notice to the Israel Tax Authority with respect to such distribution, even if the distribution was received from a Foreign Resident Settlor Trust.
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
