In accordance with the provisions of section 75J of the Ordinance, a “foreign resident beneficiary trusteeship in Israel” is a trusteeship in which, for the tax year, all of the following conditions are fulfilled, provided only that the conditions for classifying it as an “Israeli residents trusteeship” or a “trusteeship in accordance with a will” do not apply to it, as follows:
The trusteeship is an “irrevocable” trusteeship. For this purpose, it will not be considered a “revocable trusteeship” only because of one of the following options included under the definition of the creator, according to which the beneficiary may be considered a creator in the trusteeship, as follows:
When the trustee vests an asset/ income in another trustee after the demise of the last living creator, or when the trusteeship’s beneficiaries were changed without a provision in the trusteeship documents – the beneficiary will also be considered a creator in the trusteeship according to which the other trustee is acting, or in a trusteeship in which the trustees were changed, as the case may be, unless the assessment officer was convinced that the beneficiary had no influence over such a vesting, or over the change to the beneficiaries.
When the beneficiary has the ability to control or influence the way the trusteeship is managed, its assets, the determination of beneficiaries, not by the power of a determination by the creator, the appointment or replacement of trustees, or the division of the trustee’s or creator’s assets to the beneficiaries, the beneficiary shall also be considered a creator.
All beneficiaries in the trusteeship are individual foreign residents whose identity is known. For this purpose a yet unborn beneficiary will be considered a beneficiary whose identity is known.
At least one of the trusteeship’s creators is an Israeli resident.
If, upon the creation of the trusteeship, all of the above conditions existed, it is required that the following conditions also existed:
It is explicitly determined in the trusteeship documents that a beneficiary who is an Israeli resident may not be joined to it.
In a notice in form 143 it was declared that this trusteeship does not have a beneficiary who is an Israeli resident or a beneficiary who is a resident of Israel whose right in this trusteeship is conditioned upon ceasing to be a resident of Israel; and such a beneficiary may not be joined in such a trusteeship.
A trusteeship in which the conditions for being considered an Israeli residents’ trusteeship exist, or a trusteeship in accordance with a will – shall not be considered a foreign resident beneficiary trusteeship.
Taxation of a foreign resident beneficiary trusteeship –
For a foreign resident beneficiary trusteeship, the trusteeship’s assets and income will be viewed as the beneficiary’s assets and income.
In the case there are beneficiaries from a number of different states, the trusteeship’s assets will be considered to be held by residents of several foreign countries, prorated, according to the beneficiary’s residencies, and the trustee’s income will be considered to have been produced or yielded relatively by the residents of several states, according to the relevant part of the beneficiaries in the trusteeship’s revenues and assets.
As said, tax liability shall be determined according to the beneficiary’s residency for tax purposes, as follows:
At the stage of vesting the assets in the trusteeship, by the creator – vesting the assets in the trustee shall be taxable, as it would have been if the creator had transferred the assets as said to the foreign resident directly. Let it be stated, the transfer of cash to a fund does not constitute a “gift” of an asset that is taxable in Israel and hence it will not be taxed.
The stage of producing / yielding the trusteeship’s profits – the trustee’s income shall be taxed on the ongoing year in which it was produced / yielded. However, as the trustee’s income is considered that of a foreign resident beneficiary, they will be taxed in Israel only when the place of income production / yielding is in Israel.
The tax rate according to which such income will be taxed will be the maximal tax rate determined in section 121 of the Ordinance, including specific tax rates for specific types of income such as: rent, interest, etc.
The distribution to the beneficiary stage – the distribution of an asset or an income from the trusteeship to the beneficiary shall not be considered a “sale” for the purpose of the provisions of Part E of the Ordinance.
Distribution to beneficiaries after the end of the trusteeship – if, after the foreign resident beneficiary trusteeship has ended, and after all of its assets were distributed, there will still be losses yet not set off in it, that would have been taxable in Israel had they been a profit, such losses will be considered the losses of the beneficiaries, in accordance with their relative share in the trusteeship, as it was in the 4 years that ended in the year the trusteeship ended.
A trusteeship that ceased being a “foreign resident beneficiary trusteeship” is a trusteeship as said in which one of the beneficiaries became a resident of Israel for the first time, is a senior returning resident or a returning resident.
As of that time, the same rules and provisions that apply to Israeli residents’ trusteeships shall apply to this trusteeship as well. In addition, the benefits applicable to recent immigrants and returning residents shall apply to such a trusteeship, in accordance with sections 14(a) or (c), 16 or 97(b) or (b3) of the Ordinance, as the case may be, as they would have applied if the income had been produced directly by the beneficiary who became an Israeli resident (meaning, the tax exemptions for an individual for income whose source is outside of Israel shall remain).
The trustee and the creator are obliged to file the relevant statements every year, otherwise the trusteeship will be considered an “Israeli residents trusteeship” for that tax year, as if there was an Israeli resident beneficiary in that tax year.
Should the assessment officer find, despite of the creator’s and trustee’s statements, that the conditions required to classify the trusteeship as a foreign resident beneficiary trusteeship did not exist, or that the trusteeship is irrevocable, the trusteeship will be considered to have never been a “foreign resident beneficiary trusteeship” from the start, and its incomes shall be taxed accordingly.
There is a duty to file an annual report that applies to the trustee. In addition, the trustee must attach a notice in the 143 form of any distribution performed during the tax year, every year, including names of the beneficiaries and the amounts distributed to them, as well as a statement that there are no Israeli residents beneficiaries in the trusteeship, or an Israeli resident beneficiary whose title to the trusteeship is conditioned upon ceasing to be a resident of Israel and that such a beneficiary may not be joined in the trusteeship as said.
However, if the trustee is not obliged to file an annual report in accordance with to section 131 of the Ordinance, the trustee shall file the statement as said by April 30th in the year following the tax year.
This present circular letter is not intended for delivery and/or distribution to anyone apart from those to whom it is addressed. Copying, photography and /or use of this circular letter for any other purpose without the prior written consent of the representatives of the Company are prohibited.
The circular letter is of general type. The information contained herein cannot in any way replace individual consultation and/or professional legal assistance depending on the particular circumstances.
With best regards,
Lior Pick and Co., Law Firm
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