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  • Service: Tax, International Executive Services
  • Type: Regulatory update
  • Date: 3/28/2014

Israel - Guidance to resolve past tax liabilities of trusts 

March 28:  Israel’s tax authority in early March 2014 published guidance providing certain relief with respect to the taxation of Israeli resident beneficiary trusts.

The guidance (Hebrew) [PDF 241 KB] establishes a process for determining the tax status of Israeli resident beneficiary trusts in which a family relationship exists between the trust settlor and beneficiaries. It also includes a process for settling past tax liabilities of profits accruing in certain trusts.

Background

Legislation enacted in 2006 provided a comprehensive trust taxation regime. The law provided one exemption from Israeli tax and reporting, for a trust settled by foreign residents holding only foreign income and assets, regardless of the residency of its beneficiaries—known as a “foreign settlor trust.”


The new trust regime generally provided for the taxation of trusts settled by foreign residents in which one or more beneficiaries were Israeli resident (depending, in part, on the family relationship between the foreign settlor and the Israeli beneficiaries, as well as the status of the foreign settlor as living or deceased).

Guidance for taxation of trusts

Because of uncertainties regarding the classification of a trust as a “foreign settlor trust” (due to beneficiary control or influence) and also given the willingness of the Israeli tax authorities to come to an arrangement not to subject past profits accrued in formerly exempt trusts to tax, the tax authorities on 9 March 2014 issued guidance containing “transitional provisions” to allow for a process for settling the past tax liability of such trusts and (in certain circumstances) to allow for a step-up in basis on entering into the new regime.


In order for a trust to make an application for such treatment, the application (including all required supporting documents) must be submitted to the tax authorities by 31 December 2014.


Read a March 2014 report [PDF 38 KB] prepared by the KPMG member firm in Israel.




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