Your Taxes: The latest tax wrap-up

One of its main measures is a massive tax attack on trusts set up by foreign residents for the benefit of Israeli residents.

By LEON HARRIS
Money cash Shekels currency 521 (photo credit: Reuters)
Money cash Shekels currency 521
(photo credit: Reuters)
On the occasion of Rosh Hashana and Yom Kippur, Israel Tax Authority director Moshe Asher has decided, as a special concession, to postpone the monthly tax and VAT reporting and payment deadline by ONE DAY, from Sunday September 15 to Monday September 16... Let’s hope the National Insurance Institute matches that special concession.
And as a supplementary gesture of new year bonhomie, the ITA announced its plans to publish concessions regarding trusts. On August 1, the Law for the Change of National Priorities (really the budget law) became effective.
One of its main measures is a massive tax attack on trusts set up by foreign residents for the benefit of Israeli residents.
Until now, such trusts have largely been exempt from Israeli tax on overseas income and gains. Commencing January 1, 2014, the worldwide income of those trusts will be swept into the Israeli tax net if there is at least one Israeli resident beneficiary.
There is an escape clause allowing an exemption for foreign- source income distributed or allocable to a new resident or a senior returning resident (who lived abroad 10 years).
The amendment has been criticized as representing a Uturn on previous finely balanced rules introduced only seven years ago. But the biggest criticism relates to tax on past capital gains.
Suppose a trust set up by a US resident owns a property in New York that cost $100,000 in 1963 and is now worth $20 million. If the trust sells the property in 2013, the capital gain will be exempt from Israeli tax. If the trust sells the property in 2014, it appears there will be full Israeli tax to pay on the entire gain – the shekel equivalent of $19.9m.
However, the ITA has just announced its intention to lessen the Israeli tax blow. Procedures are to be introduced to reduce the tax of past income, allocate income to foreign-resident beneficiaries (does that mean exempt them?) and facilitate foreign tax credits in the trust context.
While we don’t have many details as yet, it seems the ITA wants to hark back to an earlier transitional arrangement in 2009 in which trusts paid 4 percent to 10% tax on gains that accrued in the past. If so, this won’t work. Most trusts with non-Israeli settlors (grantors) qualify for a complete Israeli exemption under the present law, and they will sell appreciated assets before the law changes at the end of 2013 and reinvest in something else.
As for allocating income to foreign-resident beneficiaries, how do you do so in the case of a discretionary trust? A discretionary trust is usually one that has no fixed beneficiaries and keeps money back for future generations.
We will have to wait patiently, albeit skeptically, to see what the ITA devises for trusts....
Wishing all our readers a very happy new year.
As always, consult experienced tax advisers in each country at an early stage in specific cases.
leon@hcat.co Leon Harris is a certified public accountant and tax specialist at Harris Consulting & Tax Ltd.