A comprehensive new trust tax regime became effective in Israel on January 1, 2006. It applies to common-law trusts and civil-law foundations, among others. As a result of teething problems, the legislation was amended in 2008, and the deadline for trust reporting for tax years 2006-2008 was extended several times. The deadline is now October 30, 2009. Time is running out, and in many cases there is much to check out and do. Here is a recap of the new rules. What is a trust? A trust is an arrangement whereby a trustee receives assets from a settlor (aka grantor, donor) and holds them for the benefit of other people, the beneficiaries. The Israeli legal side is governed by the Trust Law 1979. Until the end of 2005, many foreign irrevocable discretionary trusts with assets entirely outside Israel were often considered to be outside the Israeli tax net. What's new? The new tax regime turns the tables for an Israeli Residents Trust (IRT). This is a trust that had an Israeli resident settlor and an Israeli resident beneficiary upon formation and still has an Israeli resident settlor or beneficiary in the tax year concerned. An IRT also includes other trusts not falling into one of the categories mentioned below. Commencing in 2006, an IRT is taxable in Israel at rates ranging up to 49 percent (decreasing to 48% in 2007, 47% in 2008 and 46% in 2009) on its worldwide income, even if: ( a) the trust is irrevocable and discretionary, or (b) some of the beneficiaries reside outside Israel. Nevertheless, dividends, interest and capital gains on securities acquired post-2005 are generally taxed at 20% - or more if they relate to a shareholding in a corporation of 10% or more. Also caught by the new regime is an Israeli Resident Testamentary Trust. This is a trust created by one or more persons who were Israeli resident upon their death. If any beneficiary is Israeli resident, the Testamentary Trust will again be taxable at the above rates on its worldwide income. Where does the buck stop? In general, the trustee is "assessable and chargeable" for Israeli tax purposes without regard to his location or any foreign law. It is possible to shift the tax liability to the settlor or a beneficiary of an IRT or an Israeli Resident Testamentary Trust in certain circumstances, but only if they all agree to this. Alternatively, it is possible to shift the procedural responsibility to a representative settlor or (for an Israeli resident Testamentary Trust) to a representative beneficiary - again, only if they agree. Unless otherwise agreed, the buck stops with the trustee. The main issues The new trust tax regime is controversial in many respects. Does Israel really have the jurisdiction to compel foreign trustees to comply? If a taxable trust has Israeli and foreign beneficiaries, is it right that Israel tax worldwide income intended partly for foreign beneficiaries ? Suppose the beneficiaries have not yet been determined, are minors or are unborn? Will double-tax issues arise, as the foreign tax-credit rules are unclear in the trust context and most tax treaties are unhelpful? Amnesty for pre-2006 trusts For certain Qualifying Trusts formed before 2006, trustees can elect by June 30, 2009, to pay tax at rates ranging from 4% to 10% of the total value of trust assets plus any distributions made in the years 2003-2005 ( with a cost "step-up" for future Israeli tax purposes). The catch is that Qualifying Trusts must be irrevocable and may not have a pre-2006 tax liability, depending on the circumstances. Time for action Going underground is not an option for the trustees; the Israel Tax Authority has reserve powers to collect trust tax debts from the settlor and the beneficiaries. There may be some legitimate courses of action to check out with advisors in each country. For example: â€¢ Is the trust a Foreign Resident Settlor Trust (FRST)? If so, an Israeli tax exemption may apply to trust income and gains from foreign sources and certain Israeli sources. This exemption applies to a trust formed entirely by nonresidents or a trust with entirely nonresident settlors and beneficiaries in the tax year concerned. The exemption is conditional on the Israeli resident beneficiaries having no ability to control or influence the conduct of the trust, among other things. In practice, this may be difficult to prove. â€¢ Is the trust a Foreign Resident Beneficiary Trust (FRBT)? Provided certain conditions are met, a different exemption may apply to income and gains from foreign sources and certain Israeli sources of a Foreign Resident Beneficiary Trust formed by an Israeli resident settlor exclusively for foreign-resident beneficiaries. â€¢ Is the settlor a new or senior returning resident who migrated to Israel on or after January 1, 2007? If so, he and the trust generally enjoy a broad 10-year exemption from Israeli tax and tax reporting regarding foreign-source income and gains. â€¢ Is it worth electing to distribute or allocate income to foreign-resident beneficiaries? An Israeli tax exemption is possible, under special distribution/ allocation regulations, for income of beneficiaries living outside Israel for an irrevocable trust with an Israeli resident settlor. However, capital-gains tax is triggered when making such an election, and numerous other conditions must be satisfied. If the trustees promise to distribute income to foreign beneficiaries in the future and do not do so at least once every four years, 70% tax may ensue. â€¢ Is it worth electing the amnesty due to the cost step-up? â€¢ Is tax treaty relief available? ( Rarely, but possible.) â€¢ A combination of the above? To sum up, many alternatives may be worth considering after preparing detailed optimization calculations. The reporting deadline for 2006-2008 and the pre-2006 amnesty is June 30, 2009. The Israel Tax Authority has set up two specialist trust teams to report to: Tel Aviv Tax Office (No. 1) if all trustees are foreign; Tel Aviv Tax Office (No. 3) if any trustees are Israeli residents. 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 and trust specialist at Harris Consulting & Tax Ltd.