The Israeli taxation of trusts changed on January 1, 2014.
Sometimes fact is stranger than fiction. Sometimes fiction drives the facts. For example, on June 25 the Israel Tax Authority (ITA) announced it is extending the deadline for reporting Relatives Trusts from June 30 to two later dates (see below). The announcement says that professional bodies and trustees requested the extension. The fact is the ITA is not yet ready.
The Israeli taxation of trusts changed on January 1, 2014. Foreign Residents Trusts with a foreign resident settlor is now taxable in Israel if there are one or more Israeli resident beneficiaries.
A Relatives Trust will usually exist for Israeli tax purposes if the beneficiaries reside in Israel and the settlor (grantor) is a living non-Israeli resident.
In the case of a Relatives Trust, the Trustees will need to: (a) notify the ITA that the trust exists on prescribed forms; (b) choose between 25 percent tax on trust income annually or 30% tax on trust income if and when it is distributed New deadlines The ITA announcement of June 25 came late in the day. It says the deadline for reporting a Relatives Trust has now been extended. The old deadline was June 30, 2014. There are now two new deadlines.
The first deadline is for notifying the ITA of the existence of a Relatives Trust. Generally this deadline is December 31, 2014. But if an transitional arrangement (amnesty) is requested regarding the years 2006-13, and agreed to, the deadline is the signature date on the agreement, if earlier than December 31, 2014 (comment: this is unlikely).
The second deadline is for choosing between 25% tax on trust income annually or 30% tax on trust income if and when it is distributed. Generally this deadline is April 30, 2015, being the date for filing the 2014 tax return, unless this date is extended (again). But if a transitional arrangement (amnesty) is requested regarding the years 2006-13, and agreed to, the deadline is the signature date on the agreement, if earlier.
If no such choice is made, the trustee will be deemed to have elected 30% tax on income when it is distributed.
For other types of trusts, if they are taxable in Israel, the reporting deadline for the 2014 tax year is generally April 30, 2015.
The taxpayer is usually the trustee.
These are only reporting extensions and only for Relatives Trusts. The Israeli tax liability will apply to income of a Relatives Trust that accrues from January 1, 2014.
The official reason given for the extensions is requests made by trustees and Israeli professional bodies.
In practice, it may be assumed that many issues still need to be resolved before the new 2014 tax regime for trusts will be a workable proposition.
These issues have been heavily criticized and include the following “Dirty Dozen”: uncertain foreign tax-credit rules, especially regarding American grantor trusts; tax generally on foreign resident beneficiaries’ share if there is even one Israeli resident beneficiary; uncertainty regarding discretionary trusts; tax on the pre-2014 element of capital gains; tax on the pre-2014 element of income and capital gains if a trust adds its first Israeli resident beneficiary; unclear tax and reporting rules for immigrants; if a trust has no Israeli resident beneficiaries now, but had one in the past, the ITA thinks it is taxable; strange definition of capital – only income is taxable, not capital; no definition of “beneficiary control or influence” – which could trigger tax in 2006-13; uncertainty regarding foreign charities; the impact of tax treaties; insufficient time to prepare.
That’s the dirty dozen, but there is one more. The forms purport to be in Hebrew and English, but the English translation is wrong in places. For example, there is a crucial mix-up between settlors and beneficiaries, which means a lot of wrong information may be recorded.
The ITA has indicated it will ponder the issues and issue a circular giving guidance and clarification on the new 2014 trust regime. It was also assumed additional regulations would be needed from the Knesset, but they may be less forthcoming now due to the summer recess followed by the September-October holiday period. So take advice on how to make do with less – that is the Israeli way.
As always, consult experienced tax advisers in each country at an early stage in specific cases.
Leon Harris is a certified public accountant and tax specialist at Harris Consulting & Tax Ltd.