1.  Transitional arrangements for trusts that have been established by foreign residents:

Recently, the Tax Authority has published transitional arrangements that establish different tax tracks for trusts that have been created by foreign residents, in which there is an Israeli beneficiary, in certain cases. These arrangements are intended to cover trusts in the Israeli tax net that through to December 31, 2013 were not liable to tax or were claimed to be as such, and that from January 1, 2014, in view of the new legislation, are liable to tax in Israel.

The arrangements allow for those who choose to do so, subject to the tax payment in one of the two tracks that have been established, to resolve for tax purposes the trust capital and the trust’s taxable income for the relevant years, with an option to revaluate the trust’s assets according to their value at that time (a “Step Up” settlement), thus resolving potential disputes and exposures concerning the issue of the trust’s classification for the previous years and its tax liability, if any, accordingly.

This possibility, that is currently given to trustees in such trusts, is to be associated with the duty of beneficiaries who are Israeli residents to submit a tax return for the 2013 tax year, if they have received a distribution from a trust in that year, and particularly from August 1, 2013, and state in that tax return (whether submitted for that reason or for another reason) the distribution amount that they have received. Such reports may of course lead to the knowledge of the existence of those trusts and also arouse the curiosity of the Israeli Tax Authority (“ITA”) in all matters relating to their classification and their positional tax aspects. The transitional arrangements may be conducted on an anonymous basis.

Further details on the applicable tax rates and the various tracks may be found in our previous report on the subject dated from March 11, 2014.

2.  Postponement of required notices’ submission dates and publication of forms;

Recently, the ITA announced on the postponement of dates for submitting certain notices that have been established under the recent legislation regarding trusts – within the scope of Amendment No. 197 of the Israeli tax Ordinance (“ITO”), and the relevant forms have been published. In addition to the existing forms, two new notices and appropriate forms have been added:

–          A notice of an “Underlying Company”- according to the wording of the legislation, the

submission date (within 90 days of the date of incorporation!) constitutes a condition for the classification of such a company, and it would seem that a delay in the notice’s submission may deny the aforesaid classification, which may have severe consequences. Regarding trusts that were created prior to August 1, 2013, a notice will be submitted on the date of filing the tax return for the 2013 tax year.

–          A notice of selection of a taxation track in a “Relatives Trust”- one of the tracks for this kind of trust (as chosen by the trustee) is the annual taxation track, in which tax at a rate of 25% is imposed on the annual taxable income of the trustee, even if it has not yet been distributed to a beneficiary. Such a notice should be submitted within 60 days of the day of creating  the trust (or from the day on which it becomes a Relatives Trust) and with respect to existing trusts, a notice is to be submitted by June 30, 2014. If the annual taxation track is not chosen, the beneficiary who is a resident of Israel will be liable to tax upon the distributions that he would have received at a rate of 30%.

3.  Beneficiary’s reporting obligation concerning distributions from a trust in the 2013 tax year

The last legislative change on the subject also included the duty of a beneficiary who received a distribution from a trust to file a tax return in Israel. This notice provision is valid, according to the wording of the ITA, from August 1, 2013, and some may argue that such a duty applies only from the 2014 tax year.

To the best of our knowledge, there are trustees who have made distributions from foreign trusts to beneficiaries who are Israeli residents before the new legislation came into force, i.e. before August 1, 2013. This is under the assumption that the provisions of the new legislation concerning the reporting of distributions will not apply to distributions  before this date.

The 2013 tax return form that has been recently published requires an individual, first to indicate whether he is a beneficiary of a trust from which he has received distributions throughout the 2013 tax year!!! In addition, in another field in the tax form, the individual is required to indicate what the distribution amount is. This is informative data only, because distributions in 2013 are not taxable income by the hands of a beneficiary and in general (a tax liability may arise only from 2014 in a certain case).

In our opinion, despite the existence of such notification duty as set forth

within the form that has been published, the receipt of a distribution in money (to an unlimited amount) before August 1, 2013, in and of itself, does not impose an obligation on an individual to file an annual tax return. However, individuals who must file tax returns to the assessment office for the 2013 tax year in any case, for any reason, are required to report, according to the ITA, the distributions that they have received throughout the year.

4.   The obligation of a foreign trustee to submit documents to the assessment office in Israel

Recently, a verdict has been published in the District Court in Tel Aviv (the “Steinmetz” case) concerning the obligation of a foreign trustee in a foreign trust to provide statements and documents. In that case it was ruled that although the trust was created under a foreign governing law (that is not Israeli), and although the trustee in that trust is not an Israeli resident, there is an obligation to provide reports and documents that have been required by the assessing officer, or alternative documents, if there are any (in case that the requested document are not existing).

We should point out that the judge’s ruling does not constitute a widthwise rule that applies to all cases in which foreign trusts are involved, but was given in the circumstances of the specific case. However, the general trend of the Court and the attitude of the Court concerning the lack of cooperation between the trustee and the tax authorities may be understood and learned from this ruling, particularly when the creator of the trust and possibly the beneficiary are Israeli residents.