Recently, the Israeli Tax Authority (“ITA”) has published an addendum to execution instruction 1/2010 concerning trusts (hereinafter: “the Addendum”), in view of recent changes in legislation that had entered into force primarily in the 2014 tax year and further to forms and various notices, that the ITA has published since the announcement of the legislation.
We wish to inform you of a number of interesting comments from the addendum. We should mention that in view of the legislative changes, changes were made in certain fields in the individual’s annual tax return for 2013, including the duty of a beneficiary to report a distribution that he has received from a trust in the tax year and the amount thereof.

1. The Tax Authority is refreshing its position whereby a trustee in a “foreign” trust (a trust which considered as a foreign individual), which derives income or has an asset in Israel (thus has allegedly a duty to submit an annual tax return in Israel), will be entitled to the provisions regarding exemption for submitting tax returns applying to foreign resident (regulation no. 5 to the regulations regarding exemption from submitting annual tax return). According to that regulation, the exemption from submitting an annual tax return in Israel will apply if the full taxes were withheld (and apparently even if it is tax exempt),under certain conditions.

2. The ITA clarifies that the meaning of the “transition” from classification of an Israeli resident trust to a classification of a Testament foreign trust (in view of the settlor’s death) is like a bequeathing that is not subject to tax, as also in the case of a future sale of the foreign properties.

3. The ITA states that a relatives trust will not be considered as a foreign resident as defined in Section 1 to the Income Tax Ordinance (the “ITO”) and therefore it will be denied the exemptions provided to foreign residents. Conversely, there is no determination that such a trust is considered as an Israeli resident (as determined regarding Israeli beneficiary trust that is not a relatives trust). In the appropriate cases, one may apply to the ITA and request that for the “foreign portion” of the relatives trust, the relieves provided to foreign residents in the ITO will be provided. The ITA states that arrangements of this type will be given within the framework of the regulations for designation and distribution (such regulations providing the possibility to “split” the trust based on the proportion of Israeli beneficiaries and foreign beneficiaries), but these ostensibly do not apply to a relatives trust. We should add that this position does not rule out an argument concerning exemptions or other relieves that are granted in accordance with a double tax treaty.

4. In the “distributions track” of a relatives trust, the taxpayer and the one who is obligated to report is the beneficiary, meaning that the trustee has no reporting duties in Israel (with some exceptions).

5. Concerning the provisions applying to an underlying company (under such classification the company is disregarded for tax purposes), we should emphasize and mention that according to the wording of the law, giving a notice to the assessing officer of it being an underlying company constitutes a condition for classification of the company as such and this has significant consequences. We should also comment that (according to the ITA’s approach) in cases in which there is no duty for submitting tax returns by the trust (for example- a relatives trust in a “distributions track”, a trust whose incomes are entitled to benefits provided to new immigrants and/or long term returning residents (new immigrant and long term returning resident, hereinafter: “eligible individual”), a foreign trust which is not required to submit tax returns as mentioned above), a notice of such an underlying company is still required, despite the illogic of such a conclusion. Concerning a relatives trust in a distributions track, the beneficiary is the one who is required to submit the notice concerning the underlying company. We should comment that in many cases, the beneficiary does not have the information or the ability to provide details related to the trust’s assets. In addition, in the distributions track in a trust of this kind, there is a limited tax rate of 30% for distribution amounts amounts that the beneficiary has received in any case, and the fact that the company is an underlying company or other company is of no relevance.

6. With respect to trusts that are related to new immigrants and returning residents:

   A. In view of the new provisions of the law, by which the status of a settlor who has died, ceases to affect the classification of the trust, it has been ruled that when the settlor (who was an eligible individual) has died during the benefits period (while the trust was entitled to the benefits applying to eligible individual), the trust will not be entitled to benefit from that time on any reliefs in reporting to which an eligible individual is entitled. While this position is taken in the context of an exemption from submitting a tax return, it must be assumed that this is also the position of the ITA concerning the substantive law (exemption from tax) applying to a trust as set forth, thus effectively cancelling a previous guidelines that was published in late 2008 whereby the benefits will continue to be given to a trustee even after the death of the settlor who was the eligible individual.

   B. Although this is not stated explicitly in the law, the ITA has clarified that a beneficiary who is an eligible individual is exempt from reporting distributions that he has received during the benefits period.

   C. Although there is an exemption from submitting tax returns for a trustee in a trust and for its settlor or beneficiary, in trusts that have become “Israeli” due to the immigration or return of the “eligible individual”, the ITA still demands a notice of a relatives trust and a notice of an underlying company from those trustees, including a demand to indicate the details of the eligible individuals. We should emphasize that it is our position that this provision contravenes the provisions of the ITO that were added within Amendment no’ 168 (the “Immigrants Law”) whose purpose is to give an absolute exemption from reporting that applies to an eligible individual, and that establishing this instruction whose purpose is to deny that reporting exemption that was given. Makes no sense. Also there is no use in receiving such information from such a trust, as this trust has been exempt from taxes for ten years anyway.