The Israel Tax Authority recently extended until December 31, 2008, the deadline for reporting income derived by trusts and foundations for 2006 and 2007. The deadline for electing a tax amnesty for pre-2006 trusts has also been extended to the same date. But which trusts are affected? And what happens if they look the other way and don't report? Here is a brief recap of the new rules: New trust regime 2006 Before 2006, irrevocable trusts were considered exempt on non-Israeli-source income. A new tax regime targets Israeli and foreign trusts and foundations, commencing January 1, 2006. However, its implementation was postponed until October 31, 2008. Four main types of trust are specified in the new regime: â€¢ Israeli residents' trust: generally subject to Israeli tax on all its income if the settlor is an Israeli resident; â€¢ Foreign-resident settlor trust: potentially exempt from Israeli tax on foreign-source income (note: settlor = grantor); â€¢ Foreign-resident beneficiary trust: potentially exempt from Israeli tax on foreign-source income if all the beneficiaries are non-Israeli residents; â€¢ Testamentary trust: regarded as Israeli resident and subject to Israeli tax on all its income if the deceased settlor and any of the beneficiaries are Israeli residents. Trustees in Israel and abroad are generally "assessable and chargeable to tax" on trust income. And trustees are deemed to include foundations formed in various countries, making them taxable in Israel, too. Amnesty for pre-2006 trusts Under an amnesty, the trustees of irrevocable pre-2006 "Qualifying Trusts" may settle their pre-2006 tax liability by paying tax at a flat rate of 4 percent to 10% of the value of trust assets (usually 6% in practice). The Israeli cost-basis of such assets is then "stepped up" to the above value for future Israeli tax purposes. No foreign tax credit is allowed. Amnesty applications must be submitted to the Israel Tax Authority by December 31, 2008. Non-Israeli-resident beneficiaries In the case of multinational families, limited relief is available for beneficiaries living outside Israel if an irrevocable trust has an Israeli resident settlor, as follows: â€¢ Upon a distribution: The trustees may claim an exemption for non-Israeli income distributed to non-Israeli-resident beneficiaries. Tax paid in the previous four years may be recovered. Opting the first time has an entry price - tax at rates of up to 47% on all unrealized capital gains of the trust. â€¢ Up-front allocation: The trustees may avoid Israeli tax on non-Israeli-source income by allocating non-Israeli assets and income up front to designated non-Israeli-resident beneficiaries. The up-front allocation has an entry price: tax on unrealized capital gains on the allocated assets at rates of up to 47%. Furthermore, every four years the trustees must check that the non-Israeli beneficiaries actually received the income allocated to them; any shortfall is taxed at 70%! Reporting Reporting measures include the following: â€¢ Notices may be submitted to the Israel Tax Authority instead of annual tax returns, in certain instances. â€¢ A non-Israeli trustee may pass the "assessable and chargeable to tax" obligation to an Israeli resident settlor in the case of an Israeli residents' trust or a beneficiary in the case of an Israeli-resident testamentary trust. Reporting deadlines Where applicable, annual tax returns must be filed by April 30 (subject to any extension) by the trustee - or by the settlor or beneficiary if they agree to be "assessable and chargeable." With regard to the years 2006 and 2007, the deadline for submitting notices, declarations and annual tax returns relating to trusts is postponed to December 31, 2008. Noncompliance The question of whether the State of Israel can compel foreign residents to comply with the new trust tax regime raises complex issues. Nevertheless, Israeli tax law contains sanctions in the case of noncompliance, including the collection of tax from a settlor or from a beneficiary; in the latter case, up to the amount distributed to the beneficiary. Conclusion and action plan By December 31, 2008, trustees, professionals and other interested parties should take appropriate action including a review of the following: â€¢ Which type of trust exists under pre-1.1.06 Israeli tax law; â€¢ Which type of trust exists under post-1.1.06 Israeli tax law; â€¢ Tax-treaty relief availability, if any; â€¢ Whether to elect the 4%-10% amnesty; â€¢ Whether the trustee can/should transfer post-1.1.06 "assessable and chargeable to tax" responsibility to the settlor or a beneficiary; â€¢ Whether to elect an exemption for distributions or allocations to non-Israeli-resident beneficiaries; â€¢ Interaction with foreign taxes. Many alternatives may be worth considering based on detailed optimization calculations. As always, consult experienced tax advisors in each country at an early stage in specific cases. firstname.lastname@example.org Leon Harris is an international tax specialist.