Q&A – Israeli taxation of trusts
Gornitzky partners, Daniel Paserman and Inbar Barak-Bilu, answer questions to relevant taxation issues with respect to trusts.
Which kinds of trusts are subject to tax and reporting in Israel?
Israeli law defines five types of trusts for tax purposes, which determine the relevant tax arrangements. Israeli tax law applies to foundations, establishments, and trusts reg. as well. In principle, the classification of trust for Israeli tax purposes is determined according to the residency of the settlor and the beneficiaries (rather than the residency of the trustee, the law under which the trust was established, or the place of management and control of the trust).
Generally speaking, once there is at least one settlor or one beneficiary who is an Israeli tax resident; or if the trust holds Israeli assets, the trust will be subject to tax and reporting in Israel.
Who is the trust’s assesse?
Generally speaking, the trustee is subject to tax and reporting in Israel with respect to the trust’s income. However, under certain circumstances, it is possible to elect the settlor or the beneficiary of the trust as assessable and chargeable, assuming they are Israeli tax residents.
Is it possible to hold the trust’s asset through a company?
Under Israeli law, the trust can hold the assets through a company that may be qualified as a Trust Holding Company (‘THC’) subject to certain requirements. The THC could be an Israeli or a foreign company, and must be held in whole by the trust. A THC is a look-through entity for tax purposes, meaning that the THC is not considered an Israeli tax resident and thus not liable to taxation nor reporting. In addition, a THC is not regarded as an entity under the tax treaties which Israel has ratified. The THC’s assets and income are regarded as those of the trust for tax purposes.
Are the tax benefits granted to new and returning residents relevant for trusts?
Benefits and reliefs provided to new and returning residents may also apply to trusts if the settlor and/or all beneficiaries are entitled to those tax benefits or foreign residents. In such cases, the trust will be subject to the 10-years exemption with respect to its foreign assets and income.
I am a foreign settlor of a trust which consists foreign beneficiaries. The trust holds Israeli assets and/or has Israeli income. Is the trust subject to tax and reporting in Israel?
The trust is classified as a Foreign Resident Trust for tax purposes, however, it is subject to reporting in Israel with respect to its Israeli assets and income (subject to certain exemptions and reliefs provided to foreign tax residents under Israeli law or any applicable tax treaty).
Following the beneficiary’s move to Israel, the trust will be classified as an Israeli Resident Beneficiary Trust. If all settlors and beneficiaries are family members, the trust will be sub-classified as a Relatives Trust. In that case, the trustee can choose between the following two alternatives:
- “Distribution Basis” in which distribution to Israeli residents is taxed at a rate of 30%. However, a distribution from the trust’s capital that would have been exempt if done directly between the parties is exempt.
- “Designation Basis” in which a 25% tax rate is imposed on the trust income during the current year. In that case, future distributions will be exempt.
If the settlors and beneficiaries are not family members then the trust will be taxed as an Israeli Residents Trust.
Generally, the trust may be entitled to the tax benefits provided to new and returning residents as the benefits granted to the beneficiary.
If the conditions are not met following the settlor’s move to Israel, the trust will be classified as an Israeli Residents Trust and will be subject to reporting and tax in Israel on its worldwide income. Contributions by individuals aren’t considered to be a tax event and distributions may be taxed or exempt, as the distributed asset is viewed as if it were transferred directly from the settlor to the beneficiary. It should be noted that the trust is entitled as well to the 10-year exemption.
I am a foreign settlor of a trust which consists of foreign beneficiaries. One of the beneficiaries is moving soon to Israel. Will the trust be subject to tax and reporting in Israel?
Right now the trust is classified as a Foreign Resident Trust for tax purposes. As such, the trust is not subject to tax or reporting in Israel, assuming there are no Israeli assets or income.
I am a foreign settlor of a trust which consists of foreign beneficiaries. I am moving soon to Israel. Will the trust be subject to tax and reporting in Israel?
Currently, the trust is classified as a Foreign Resident Trust for tax purposes. As such, the trust is not subject to tax or reporting in Israel, assuming there are no Israeli assets or income.
If the trust is irrevocable and the identity of all beneficiaries is known, then following the settlor’s move to Israel, the trust will be classified as a Foreign Resident Beneficiary Trust. This kind of trust is regarded as a foreign resident for tax purposes. Therefore, only Israeli sourced income is subject to tax. Contributions are liable to taxation as if the assets were transferred directly from the settlor to the foreign beneficiary, while distributions are not liable to taxation in Israel. The trust will qualify as an Israeli Resident Trust once the foreign beneficiary moves to Israel, and will be entitled to the 10-year exemption, based on the beneficiary’s benefit period.
