Only in Israel could it happen. On February 3 the Israel Tax Authority finally got around to announcing that the already expired deadline of January 27 for filing Relatives’ Trust forms would be extended to June 30.
What is it all about? Last July 29, the Knesset enacted Amendment 197 of the Income Tax Ordinance as part of the budget law, formally known as the Law For the Change of National Priorities (Legislative Amendments for Achieving Budget Goals in 2013 & 2014), 2013.
This amendment included a 180-degree turnaround regarding trusts settled by foreign residents for the benefit of Israeli resident beneficiaries.
Until the end of 2013, trusts settled by foreign residents in favor of Israeli resident beneficiaries were usually outside the Israeli tax net – unless the beneficiaries exercised “control or influence” over the trust.
Commencing January 1, 2014, Israel wants to tax any trust anywhere in the world that has an Israeli resident beneficiary.
If the settlor or his/her spouse live outside Israel and are related to an Israeli resident beneficiary (a “Relatives’ Trust”), the ITA will start imposing tax at a rate of 30 percent of any income distributed to beneficiaries.
Alternatively, it will be possible to elect 25% on annual trust income, regardless of distributions. Questions remain regarding beneficiaries residing outside Israel and capital gains that accumulated over many past years.
The forms must generally be filed by the trustees. They must report new Relatives’ Trusts on Israeli Tax Forms 147 and 154 within 60 days. As for Relatives’ Trusts formed before the end of 2013, the deadline for filing the forms has now been extended from January 27 (or 31) 2014 to June 30, 2014.
Note that if the settlor and his/her spouse are both deceased, the trust becomes an “Israeli Residents’ Trust” and will need to pay Israeli tax at rates of 30% to 52% of annual trust income, regardless of distributions. Annual tax returns will need to be filed, usually by the trustee.
What’s in the forms? Form 147 deals generally with the formation of trusts or contributions to them. It used to be in English and Hebrew but has just been reissued in Hebrew only. It asks for various details about: the trust, the trustees, a postal address in Israel, the protector (if any), the settlors, the beneficiaries, the relationship to the settlor (not stated whose relationship!), assets contributed to the trust, the reporting party.
According to the Form 147 footnotes, the contributor must also file Form 147 within 90 days of contributing assets, and so must trust settlors if they are olim (new residents and senior returning residents who lived abroad 10 years) by April 30 of the year after they become residents of Israel. However, the footnotes go on to refer to a section in the law that only requires reporting during the 10-year tax holiday for olim if the trust has assets in Israel, NOT abroad! So the olim tax holiday and tax reporting holiday is preserved for overseas income and assets. But the form could have been better designed.
Form 147 also asks whether the trust is revocable or irrevocable, and it stipulates that Form 141 must be filed; the ITA invariably insist on this, even though being revocable is only relevant to a few types of trust.
Form 154 deals with Relatives’ Trusts. It must generally be filed by the trustee, or by the beneficiary if he/she wants to pay 30% tax on distributions only. Form 154 requires various details about: choice of tax (25% or 30%) as mentioned above, the trust, the relationship to the settlor (again, not stated whose relationship), the settlors, the beneficiaries, the reporting party.
Other trust tax forms are also required in certain circumstances.
Comments at this stage The forms are bureaucratic, unclear and perhaps controversial, so the extended deadline of June 30 is welcome.
By then it is hoped that the ITA may hopefully deliver upon other intentions announced last September 1.
These intentions apparently include: to issue guidance about trust taxation; to clarify foreign tax-credit rules in the trust context; to exclude foreign beneficiaries’ share of trust income (if known) from the Israeli tax net; to allow a concessionary rate of tax on trust capital, as a transitional relief for (1) stepping up the cost of trust assets to market value and (2) resolving any doubts about beneficiary “control or influence.”
Trustees and other interested parties should start preparing, but wait and see what the ITA actually publishes in the coming weeks or months. Other legitimate tax-planning steps should also be considered without waiting. Professional advice should be obtained on all aspects.
As always, consult experienced tax advisers in each country at an early stage in specific cases.
firstname.lastname@example.org Leon Harris is a certified public accountant and tax specialist at Harris Consulting & Tax Ltd.