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The Israeli Tax Authority announced on December 18 a six month extension until June 30, 2009, for submitting all reports relating to trusts, including Amnesty requests for pre-2006 trusts and annual tax returns due for the years 2006 - 2008, where applicable.
This follows the enactment of a comprehensive new Israeli trust tax regime with effect from January 1, 2006. The Amnesty enables pre-2006 irrevocable trusts to pay tax at a rate of only 4 percent to 10% of their value at the end of 2005 to clear any past Israeli tax exposure and "step up" the cost carried forward.
Trustees are responsible for reporting and paying the tax, unless the settlor (or a beneficiary of a testamentary trust) accepts the responsibiility.
The Israeli Tax Authority has also clarified the following:
In certain cases where the Amnesty is not fully applicable in the circumstances, the Israeli Tax Authority may adapt the arrangement accordingly.
When calculating the value of a trust for Amnesty purposes, the applicant may opt to apply the exchange rate currently prevailing on the date of signature on the Amnesty agreement with the Israel Tax Authority rather than the rate at the end of 2005.
Any tax due according to the Amnesty or tax returns for 2006 and 2007 will bear interest and indexation (inflation adjustment) from June 30, 2008 until the date the tax is paid.
Assessing Officers will entertain requests to allow payment of Amnesty tax in instalments or to postpone the payment.
Additional guidance regarding trust taxation will be published soon.
TIME: The six month extension will provide trustees and others with more time to organize and reorganize.
ADAPTED AMNESTY: Requests for an "adapted" Amnesty should be considered carefully, especially if anyone migrated to Israel or received an inheritance from abroad.
CURRENCIES: Since the shekel has strengthened against some currencies such as the US dollar and the South African rand, the permitted choice of exchange rates is important.
PAY LATER: Trusts with real estate or other assets which are difficult to sell in today's markets may wish to consider opting for the Amnesty and requesting to pay the resulting tax by installments or on a postponed basis.
HIDDEN TRAP: Potentially large amounts of interest and indexation may be added to any tax payable regarding years prior to 2006 by a trust which does not get an Amnesty - for example, a revocable trust. This is because the interest and indexation will continue to accrue from the end of the tax year concerned, not from June 30, 2008.
SILVER LINING: The exemption for Israeli underlying companies held by certain trusts remains unchanged.
As always, consult experienced tax advisers in each country at an early stage in specific cases.
Leon Harris is an international tax partner at Ernst & Young Israel