For many years, Israel has not taxed its residents on any distributions received from trusts established by a foreign resident settlor (unless the beneficiaries exercised “ control or influence” over the trust.) Beneficiaries were not even required to report such distributions . The new law will subject many previously tax-exempt trusts to a significant income tax liability. The reporting and tax obligations are imposed even if there are no assets in Israel, no trustee in Israel and the settlor is not an Israeli resident.
Under the new law , any trust with foreign settlors and at least one Israeli resident beneficiary will now be taxed . Pending further clarification it seems the term beneficiary can include a discretionary beneficiary as well as a beneficiary who has an interest in possession. In situations where the settlor is related to the beneficiary, known as a “Relatives Trust” , trustees must notify the Israeli tax assessor of the existence of such trusts by 27 January 2014 ( or within 60 days of its establishment). They must then choose between the Deferred Tax Regime and the Alternative Regime . Under the Deferred Tax Regime , the Israeli resident beneficiary is taxed at a 30 % rate upon distributions when received. Alternatively the trustees may make an irrevocable election to be taxed under the Alternative Regime, which imposes a 25 % tax at the trust level on a yearly basis regardless of distributions. If the settlor and his/her spouse are both deceased , however, the trust becomes an “Israeli Residents’ Trust ” and will pay tax at rates of 30 % to 52 % of annual trust income, regardless of distributions.
The onus is on the trustee to report and pay the tax , notwithstanding any foreign law , but the Israel Tax Authority can also enforce unpaid tax debts against the beneficiaries. Practically however it may not know who they are without notification.
Whilst further guidance and regulations are still expected, ignoring the changes will clearly not be an option for trustees affected by these new rules . Legitimate tax breaks are understood to include a ten year exemption from Israeli Tax on overseas income or gains if the settlor or beneficiaries are new residents , or senior returning residents after living abroad for ten years.
For further information, contact Robert Drysdale, Associate, Wealth Planning +44(0)20 7689 7168 or email rdrysdale@rooksrider.co.uk
