We wish to put forth before you in summary a number of newsflashes that our office has published on the subject of trusts in the last quarter.

As an introduction to the cases set forth below, it must be noted that the trusts chapter in the Israeli Income Tax Ordinance that took effect in 2006 grants a trust a legal status for tax purposes as of an individual, which is a foreign resident or resident of Israel, in accordance with the classification of the trust in the trusts chapter. The questions that arise from the cases that are set forth below pertain to the special status that has been given to the trust as that of an individual, in the context of various arrangements that exist in the Ordinance.

The eligibility of a trustee to enjoy benefits for foreign residents when Israeli beneficiaries exist

The Income Tax Ordinance grants a number of tax benefits for foreign residents, the most familiar and common of which is an exemption from capital gains tax from the sale of securities. At the same time, there is an anti-planning clause that states that a foreign company that is controlled by a resident of Israel to a rate of 25% or more will not be eligible for exemptions that are given to foreign residents pursuant to the ordinance.

It may be asked whether the anti-planning clause applies in a situation in which a foreign company is held by a trust whose settlor is a foreign resident and whose beneficiaries include a resident of Israel. Such a trust is classified in the trusts chapter in the Ordinance as a “foreign resident settlor trust” that is considered as an individual that is a foreign resident.

It is our position that the provisions of the trusts chapter supersede the anti-planning clause, both because the trust chapter was passed later and it deals in great detail with all matters relating to tax events in trusts, and because the purpose of the passing of the chapter indicates that the whole trust is to be considered a foreign resident, concerning the question of the applicability of the anti-planning clause too.

A trust as a representative assessee in a “family company”

Within our daily work, we have been asked to attend to the question of whether a trust can be a representative assessee in a “family company”.

A family company is a company that is controlled by members of a single family, and the tax regime that applies to it, according to the choice of its shareholders, is a regime of transparency for tax purposes, insofar as its liable incomes and losses are considered to be the incomes and losses of the “representative assessee”, who is the holder of the largest right to the profits of the company. A company that is fully owned by one individual may also be considered as a family company.

According to this approach, any trust may be a representative assessee of a family company because it is considered as a single individual rather than as a cluster of legal entities that constitute it.

According to a more balanced approach, if the settlors or beneficiaries of the trust (as relevant, depending on the type of trust) constitute members of a single family, the trust may be a representative assessee of a family company just as those family members could have been were to hold the shares of the family company directly, insofar as the formation of the trust in this context does not constitute an attempt to evade tax. It shall be noted that the trusts chapter purports to be neutral and not provide a tax advantage or disadvantage compared to the state in which there is no trust, but this principle is not always achieved.

Trust for wealthy trustees

From January 1, 2013, an additional tax is imposed on individuals who have high incomes (more than approximately $220,000 in the taxable year, as of this date), except for certain income items that have been prescribed. It is asked whether the additional tax also applies to a trust, and if so, to which sum of income.

Because a trust has a taxation status of an individual, as set forth, it may be contended that the additional tax applies to it as it applies to an individual. However, in a trust that is a resident of Israel, for example, the income of the trust is considered to be the income of the settlor and if there is more than one settlor (for example an individual and his spouse), in our opinion the income is to be attributed (in the aspect of calculation of the additional tax) to both of them. Thus, if after such an attribution to both, the income of each of the spouses does not exceed the said maximum amount, no additional tax will be imposed.

Another contention is that even if the spouses had an income exceeding the maximum determinant sum for the purpose of the additional tax, the income of the trustee is to be examined separately and not attributed to the spouses due to the absence of an explicit provision. An opposite contention that may be made by the Tax Authority is that the income of the trustee is liable for the additional tax from the first shekel.

Tax ruling on the matter of an underlying holding company

Recently, a tax ruling that deals with the classification of an Israeli company as an underlying holding company was published. The trusts chapter of the Israeli Income Tax Ordinance allows a trustee to keep and manage the trust assets, in part or in full, through an underlying holding company, for which it has been determined that it will be considered as the long arm of the trustee and its assets and incomes will be considered as the assets and incomes of the trustee. As a result of this, such an underlying holding company is not required to submit statements and transfers of assets to it are considered as transfers to the trustee. A number of interesting points that arise from the tax ruling follow:

1. The facts of the case indicate that the only activity of the underlying company, which is fully held by the trustee, is holding and operation of the assets of the trustee. We must point out that these are not requirements pursuant to the Ordinance and the tax ruling does not discuss one of its conditions either. Pursuant to the provisions of the Ordinance, a holding company is not barred from engaging in other activities that are not related to trusteeship and it is not required to be held fully by the trustee either (even if these are usually the cases).

2. One of the conditions of the ruling states that a trustee will not be able to withdraw a request for classification of the holding company as an “ordinary company”. In this case too, we must point out that there is no such explicit restriction in the trusts chapter. However, it may be contended that such a change in classification may involve tax events, such as an event of the sale of the assets of the trustee to the company or an event of distribution to the beneficiaries (although in our opinion, particularly if all shares are held by the trustee, this is not a distribution).

3. A holding company will not be considered as a resident of Israel (because it is not an taxpayer for tax purposes in Israel and its incomes are effectively attributed to the trustee himself) and accordingly it will not receive a residency certificate. An interesting question on this matter is what the treatment of other countries to the status of such a holding company is.