Israel Changes its Tax Law To Include the Taxation of Many Foreign Trusts

December 2013Articles Bloomberg BNA

Introduction

For many years, Israel had a tax regime that was extremely advantageous for foreign trusts, defined for the purposes of this article as trusts settled by a foreign person with a foreign trustee unrelated to the beneficiaries. Not only did Israel refrain from taxing its residents on any distributions they received from trusts created by foreign person, but beneficiaries were not even required to report such distributions. This all changed when the Israeli Knesset passed its recent tax reform law, effective January 1, 2014, subjecting many previously tax-exempt trusts to significant Israeli income tax liability. (Note: The new law was intended to tax trusts that do not pay tax in any jurisdiction. However, unfortunately, the law was written very broadly, and includes trusts paying taxes elsewhere, which can be problematic, as is discussed below with respect to double taxation.)

The reporting and tax obligations discussed below are imposed even if there are no trust assets in Israel, no trustee resident in Israel and the settlor is now an Israeli resident. With this new law, Israel went from one extreme to the other – from imposing no tax or reporting requirements on foreign trusts to imposing rigorous reporting requirements and significant taxes on foreign trusts with the beneficiary being the only connection to Israel. Since the law imposes a number of deadlines that occur in early 2014, time is of the essence to plan and comply, but further guidance is needed from the Israel Tax Authority before this can be done with certainty.

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