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Q: I reside in Israel. Do I have to file an Israeli tax return?
A: Each year detailed regulations are issued stating which Israeli resident individuals must file annual tax returns. Such returns are generally due by April 30 following each tax year (calendar year) unless an extension is obtained. Among those that must file are those in business or holding 10% or more of a company; those who, together with his spouse and children under 18 years old, held at any time during the tax year foreign assets with a value of NIS 1.5 million or more; or in fact anyone holding or foreign securities of any value. If you are primarily a salary earner, a short return may be sufficient. For more details, see the Israeli Tax Authority's publication "Know Your Rights" (in Hebrew) or consult an Israeli Accountant or Tax Advisor.
Each year these Israeli reporting rules are updated, so it will be necessary to check for changes.
Q: I inherited property abroad before I took up residence in Israel. If I sell the property, am I taxed in Israel?
A: Generally you won't pay capital gains tax in Israel if you sell the property within 10 years after taking up residence in Israel. If you sell after 10 years, a partial exemption may be available.
Q: If an Israeli resident settled a trust abroad several years ago, how is Israel going to make foreign trustees report and pay tax under the new Israeli tax rules for trusts that begin in 2006?
A: The Israeli tax law is unique by international standards as it stipulates that foreign trustees must report to the Israeli Tax Authority notwithstanding any foreign law. In addition, the Israeli Tax Authority is allowed to collect final tax debts from the settler or the beneficiaries - assuming they are known, alive and contactable by the Israeli Tax Authority.
In practice, it seems foreign trustees will usually need to be satisfied that it is in the interest of the beneficiaries to report and pay the Israeli tax. This won't be easy if there are both Israeli and foreign resident beneficiaries to consider or if the beneficiaries are not yet known. The ITA have reportedly promised to refrain from taxing income intended for foreign beneficiaries, but no regulations to this effect have yet been issued. So it remains to be seen whether and how foreign trustees will react.
Q: I came to live in Israel some years ago and receive a pension from my old country. Will I be taxed in Israel?
A: Briefly, the pension income is exempt during the first five years of Israeli residency. After that, your Israeli tax is not to exceed the tax you would have paid if you had stayed in your old country. Alternatively, at the official retirement age (say 67 here), you may elect a 35 percent exemption and to pay regular Israeli taxes on the other 65%, i.e. an effective tax rate of around 32%. Some tax treaties contain helpful clauses. For example, the US-Israel tax treaty exempts Israeli residents from both US and Israeli taxes, but only on US social security payments.
Q: I am about to sell my Israeli start-up company for $20 million worth of shares of the acquiring company. Do I have to pay tax now, even though I won't receive cash yet?
A: In principle, a capital gain transaction is reportable and the tax is payable within 30 days after entering into the transaction. This will be difficult if part or all the consideration is shares, or deferred until sale or profit targets are met ("earn-out"). In this case, consult your tax adviser about requesting an advance tax ruling that may allow a deferral of the taxable event from the Israeli Tax Authority until a cash sale occurs - this is often permitted in bona fide cases subject to various conditions and depending on the circumstances.
Q: In the light of recent reports, are trusts established before 2006 taxable in Israel?
A: That's a broad question and it is necessary to consider when the trust generated the income or capital gains.
For income and gains generated before 2006, the Israeli tax rules were rudimentary. It was generally thought that an irrevocable discretionary trust with no Israeli administration or assets lay outside the Israeli tax net. It was unclear if capital gains tax applied when assets were moved into a trust - was this a sale or a gift? Nevertheless, it was clear that income from a "revocable disposition" could be related back to the "disposer" and taxed in Israel - this is similar to a "grantor trust" in the US tax law.
For example, suppose Jacob set up a trust for the benefit of his children, but he or his wife, Rachel, retained the right in the trust deed to a direct or indirect return of trust income or trust assets or the right to control the trust income or assets. That was a revocable disposition and Jacob was taxable on the trust income. But suppose Jacob's daughter Dinah (a trust beneficiary residing in Israel) reached adulthood and began controlling the trust - was that a "revocable disposition?" It seems the Israeli Tax Authority may think so and/or or that the trust was "artificial or fictitious" making its income taxable. An unanswered question is whether a genuine trust could be considered a "revocable disposition" if the settler is incapacitated or has since passed away.
For income and gains generated in 2006 onwards, a comprehensive new trust tax regime applies. Very briefly, an Israeli Residents' Trust established by an Israeli resident settler for an Israeli resident beneficiary will generally be taxable even if there are also foreign beneficiaries.
Other trusts may be taxable on any Israeli source income and gains, but not necessarily on foreign source items if various conditions are met. This is regardless of when the trust was first established. And a trust is taxable if any Israeli resident beneficiary has the ability to control or influence or influence the conduct of the trust. Dinah and others, you have been warned.
Needless to say, specialist advice must be obtained on all trust matters in each country concerned. For greater certainty, consider requesting a ruling from the Israeli Tax Authority, confirming and clarifying the position in a specific case.
Put your questions to Leon Harris: [email protected]
The writer is an International Tax Partner at Ernst & Young Israel.