Multi-national families linked to trusts with an Israeli resident might get a rude awakening on January 1, as their trust income may become fully taxable when the new Israeli trust tax reform takes effect with the new year. As of January 1, Israel's tax authority will impose tax on trusts when at least one beneficiary and one settler (the original owner of the assets of the trust) are Israeli residents. Tax exemptions are only available if all settlers or all beneficiaries are non-Israeli residents, subject to various conditions. "Eventually there will be regulations that will give double tax relief but they have not yet been issued, and this is causing impatience," said Leon Harris, International Tax Partner at Ernst & Young Israel. Previously, Israeli residents enjoyed a territorial tax system that did not tax foreign-source passive investment income such as dividends, interest, rent, and royalties first received abroad. The new legislation, however, will grant foreign residents who set up trusts in Israel far reaching tax benefits - for example, the ability to avoid tax legally. "The new tax trust regime might create a new off-shore tax haven for foreign investors as well as encourage foreign investment," Harris said. At the same time, foreign residents of a mixed trust, even with just one of the beneficiaries being an Israeli resident at the time of establishment, will be fully taxed. As such, the law determines trust tax liabilities dependant upon the identity and tax residence of the settler and the beneficiary. The new law applies to all trusts even if they were created before January 1, 2006, but will only affect trust income generated after that date. Much controversy still surrounds the new requirements under the tax reform for filing annual tax returns to the Tax Authority by the trustees, which might be individuals or a corporate entity. The trustee, himself will be liable for paying taxes and will be assessed according to the trust's income. Failure to file the required tax returns may endanger the taxpayer's right to reduced tax rates, among other things. The reporting requirements will need cooperation of the foreign trustees who have to submit the annual reports, but, although the reforms are just days away, the new forms and guidelines have yet to be published by the Israeli Tax Authority. "It is not clear how foreign trustees will react to these new reporting requirements and how they are going to submit forms which are formulated by Israel tax authorities in Hebrew," said Alon Kaplan advocate and chairman of the Society of Trust and Estate Practitioners Israel. If there are a number of beneficiaries with different interests, the trustees may have to apply to foreign courts for permission to comply with the new Israeli tax law, Harris noted.