Step Annual conferance 2016

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www.ahec-tax .co . i lwww.ahec-tax .co . i l

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STEP Israel Annual Conference - June 2016

Ran Artzi c.p.a - Managing Partner

Artzi, Hiba, Elmekiesse, Cohen - Tax Solutions L.t.d

www.ahec-tax.co.il

Trusts Tax PlanningRisks and Opportunities

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www.ahec-tax .co . i l 2

Risks/faults

Creation of a trust by an “ordinary” returning resident after

returning to Israel

Tax Accident in the case of immigration of a beneficiary in a foreign

residents trust

An Israeli trust forever?

Opportunities / advantages

Inheritance of losses – is it possible?

Use of the “Israeli” status of a trust

Ta b l e o f C o n t e n t s

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Creation of a trust by an “ordinary” returning resident

after returning to Israel

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An “ordinary” returning resident – a person who has returned

to Israel after residing outside of Israel for six years at least

(and less than ten years, in which case he will be considered a

“long-term” returning resident)

The exemption in effect:

Five years for passive incomes (interest, dividends, rent, etc.)

Ten years for capital gains (after the end of the period the exempt part of

the capital gain will decrease on a linear basis)

In general, the exemptions applying only to assets that the returning

resident possessed on the date of his return to Israel

The law applying to an “ordinary” returning resident

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Section 75G(E) of the Income Tax Ordinance ("ITO") states:

Concerning an individual who returned before August 1, 2013- the

trustee will be given the exemptions and benefits given to an

“ordinary” foreign resident

Concerning an individual who returned from August 1, 2013

onward- the provision above will apply, as long as all of the

beneficiaries in the trust are foreign residents, new immigrants or

returning residents

A trust that has become an "Israeli Residents Trust" following the return of the settlor (as a

returning resident)

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Section 75G(E1) that has been added to the ITO in Amendment 197

from the 2014 tax year, entitles the trustee to enjoy the benefits for

the rest of the benefits period of the settlor- but only with respect

to a new immigrant or a long-term returning resident who created a

trust after his immigration or return

This approach was adopted by the Israeli Tax Authority ("ITA") even

before the 2014 tax year, reflected in a clarification that was published

by the ITA on December 9, 2008, also concerning a new immigrant

and a long-term returning resident only

An "Israeli Residents Trust" that was established after the settlor's return

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The meaning (ITA approach): in a trust that was created by an ordinary returning resident

after his return, the trustee will not be entitled to benefits that are given to a returning

resident- even if the settlor is also the sole beneficiary of the trust !!!

A possible solution: the use of the mechanism appeared in Section 75G(H) of the ITO,

enabling to allocate all the trust's income to the settlor, thus- to allow the entitlement of

the settlor to the relevant benefits and exemptions. However- this is not the solution for

all cases.

A possible legal argument: the benefits and exemptions applying to a returning resident

will be given also to the Trustee for the rest of the benefit period- pursuant to the rule

prescribed in Section 75G(B) of the ITO- “In an Israeli residents trust, the income of the

trustee will be considered as the income of the settlor and the assets of the trustee as the

assets of the settlor”

An "Israeli Residents Trust" that was established after the settlor's return

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Tax Accident in the case of immigration of a beneficiary in a

Foreign Residents Trust

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An individual who is a foreign resident forms a trust to the benefit of his sister and her

three children who are foreign residents, one of the children being an adopted child.

In 2017 the children immigrate to Israel

Until the time of immigration, the trust is classified as a “Foreign Residents Trust”

pursuant to Section 75(I) of the ITO because “a foreign residents trust is a trust for

which in the tax year, all of its settlors and beneficiaries are foreign residents”

At the time of immigration, the trust changes its classification to an "Israeli Resident

Beneficiary Trust" pursuant to Section 75H1 of the ITO because “an Israeli resident

beneficiary trust is a trust that from the date of its creation until the tax year, all of its

settlors are foreign residents and in the tax year it has at least one beneficiary who is

an Israel resident”

Case description

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“A relatives trust” is an Israel resident beneficiary trust in which all of its

settlor’s and its Israel resident beneficiaries are family members…”

In the view of the ITA, in Taxation Decision 6826/14 – the relations must be

examined only from the perspective of the settlor! In accordance with the

taxation decision and the definition of a “relative” in Section 88 of the ITO:

The settlor is considered a “relative” of his sister’s children (“a brother of a parent”);

Not all of the children of the settlor’s sister are considered his relatives. The adopted

child is not considered a relative of the settlor because he is not an “offspring”;

The meaning of this is that in the view of the ITA this is an Israel Resident

Beneficiary Trust that is not a Relatives Trust;

Is this a "Relatives Trust“?

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Section 75H1(G) of the ITO states that “if the trust became a relatives

trust after one beneficiary thereof became an Israel resident for the

first time, a long-term returning resident or an "ordinary" returning

resident…” the relevant benefits are also to apply to the trustee in the

trust

In this case, in the view of the ITA – because it is an Israeli Resident

Beneficiary Trust that is not a Relatives Trust, the new immigrant

benefits clauses will not apply to the trustee even though the only

reason for the trust becoming Israeli is the immigration of its

beneficiaries.

The law applying to the trust

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What rule applies after four years, for example, if the settlor immigrates to Israel?

the trust changes its classification from an “Israeli Resident Beneficiary Trust” to an “Israel

Residents Trust”;

Section 75G(E) of the ITO will apply, stating that if “the trust became an Israeli residents trust

after one settlor thereof became an Israel resident for the first time”, the benefits relevant to

new immigrants will apply to the trustee, but only for the remaining of the benefits period of

the beneficiary (i.e. six years)

Under that approach, what will happen if the trust incurred losses in the first four years

regarding some of its assets/securities?

Securities with value decrease can be sold prior to the settlor's immigration to Israel, allowing

to offset the losses against current or future capital gains;

Securities with value increase can be sold following the settlor's immigration to Israel, allowing

the entitlement of exemptions applying to capital gains from foreign securities;


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An Israeli trust forever?

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The chain of events:

In the 1980s, a foreign resident individual established an irrevocable trust

to the benefit of his adult son;

In the early 1990s, the settlor and his son immigrated to Israel;

In 2017 the beneficiary left Israel and became a foreign resident;

In 2020, his father, the settlor, joined him and also became a foreign

resident.

In effect, from the 2006 tax year, in which the trusts chapter has

entered into force, this is an Israeli Residents Trust pursuant to Section

75G(A)(2)- the default provision.

Case description

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Section 75(I) of the ITO was changed in Amendment 197, to the effect thateffective from the 2014 tax year it no longer relates to a “Foreign ResidentSettlor Trust” (which no longer exists) but a “Foreign Residents Trust”;

The section enumerates four possibilities for a trust to be considered aForeign Residents Trust:

In the tax year, all of its settlors and beneficiaries are foreign residents

Or all of its settlors are foreign residents and all of its beneficiaries are "public

purposes beneficiaries" (in general- qualified institutions) or foreign residents, and

it has not had a Israel resident beneficiaries since the time of its creation

And a trust whose settlors are all deceased and all its beneficiaries in the tax year

are foreign residents

Or all of its settlors are deceased and all of its beneficiaries are "public purposes

beneficiaries" or foreign residents, and it has not had Israel resident beneficiaries

since the time of its creation;

The approach of the ITA concerning a “Foreign Residents Trust"

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In the view of the ITA- the condition of the absence of an Israel resident

beneficiary is relevant to all of the options above, and in effect there are only

two options that the section enumerates:

That in the tax year, all of its settlors and beneficiaries are foreign residents, or all

of its settlors are foreign residents and all of its beneficiaries are public purposes

beneficiaries or foreign residents – and which has not had Israel resident

beneficiaries since the time of its creation

And a trust whose settlors are all deceased and whose beneficiaries in the tax year

are all foreign residents, or whose settlors are all deceased and whose beneficiaries

are public purposes beneficiaries or foreign residents- and which has not had Israel

resident beneficiaries since the time of its creation

The approach of the ITA concerning a “Foreign Residents Trust"

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2017, the time at which the beneficiary left – the trust is classified as a

Foreign Resident Beneficiary Trust, with characters of a foreign resident

individual

The said classification is contingent to certain conditions, such as the question of

irrevocability;

According to Section 75H(B), when changing the classification from an Israeli

Residents Trust to a Foreign Resident Beneficiary Trust- the assets of the trust are

considered as having been sold to a foreign resident (effective from 2003 there has

been no exemption for a gift given to a foreign resident);


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2020, the time at which the settlor left Israel:

The trust is supposed to change its classification to a Foreign Residents

Trust, and no special tax event is supposed to occur at this time;

In the view of the ITA, because a significant condition in a Foreign

Residents Trust is that it has never had an Israeli resident ever, the trust is

considered again as an “Israeli Residents Trust” pursuant to the default

section [75G(A)(2)]

In effect, this may be the only case in which a trust becomes

an Israeli trust following the settlor leaving Israel;


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Inheritance of losses -is it possible?

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An Israeli resident individual and his two sons, each one individually, make significant

passive investments, primarily in traded securities and other investments. In 2020, the

father passes away after having incurred many losses from securities over the years.

Question: can the remaining losses that the father had at the time of his death, be

offset against profits generated by the sons (inheritance of losses)?

Answer: according to the provisions of the ITO, losses that a taxpayer still has at the

time of death are effectively abolished. In a district court verdict (Shraga Case, District

Appeal 41641-01-14) it was ruled that losses incurred by a deceased business owner

may not be offset by the heirs against the profit generated from the sale of the land on

which the business was located, and in conclusion - losses are not inheritable.

Presentation of the subject

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The father establishes a trust to which he transfers the capital that will be used for

investments:

The trust is an irrevocable trust according to the definitions in the trusts chapter

The trustee retains the services of an investment manager who will manage the financial

investments

The distribution policy of the trustee is based on sole discretion and relates, inter alia, to

the current needs of the children and optimization of the net yield of the investments;

At the time of creation of the trust and transfer of the assets to it, there was no tax event

because it is an Israeli Residents Trust

In the current years, the trustee may utilize the mechanism in Section 75G(G) of the ITO and

distribute part of the trust's income to the children which will be considered as the income

of the children, i.e.: losses incurred by the children from their investment activity may be

offset against profits distributed to them by the trustee;

The advantage of a trust

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Section 75N(B) states: “If an Israeli residents trust whosesettlors have all died before the tax year, and after thedistribution of its assets, losses remain in it…, the losses willbe considered as losses of the beneficiary;…”

The meaning is that in the year after the death of the settlor,the trustee eliminates the trust and distributes the trust'sassets to the beneficiaries. Accrued losses that remain in thetrust will also be "transferred" to the beneficiaries, thusallowing the inheritance of losses.

The elimination of the trust in the death year will prevent theability of inheritance of losses!

The rule after the father’s death

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Use of the “Israeli” status of a trust

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A group of Israeli investors making an investment in a real estate company

overseas sometimes incorporate within an Israeli or foreign partnership. In

this framework there are two significant issues:

Upon the transfer of the investment money abroad, an exemption from tax

withholding is required. In many cases, the assessment officer asks for matching

certificates of zero tax withholding from each one of the partners in the partnership

in order to give the exemption for the transfer;

At the time of receipt of profits from the investment (interest, dividend and capital

gains), it is necessary, in the case of a treaty country, to provide a certificate of

Israeli residency for treaty purposes, by each of the partners in the partnership;

Presentation of the subject

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Creation of an Israeli Residents Trust:

The investors are the settlors and beneficiaries of the trust;

The trustee in the trust supervises and/or manages the investment aspects

on the part of the investors. An advisory committee composed of some or

all representatives of the investors may be established to advise the

trustee;

The profits of the trust may be distributed to the beneficiaries (the

investors themselves) in accordance with distribution instructions

prescribed within the trust deed;

The advantage of the trust

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An Israeli Residents Trust is considered as a taxpayer with an Israeli resident

status for tax purposes and therefore the exemption certificate from tax

withholding (upon transfer the investment amount abroad), can be given to

the trustee, with no need to procure equivalent approvals from the settlors;

At the time of receipt of profits by the trust, because it is a taxpayer for

Israeli tax purposes, the trust should receive an Israel residency certificate

for tax purposes and may present this certificate to the foreign paying

entity in order to implement the limited tax rates or other benefits in the

relevant tax treaty

The advantage of the trust

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Thank you

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Ran Artzi, CPA - Managing Partner

[email protected]

Artzi, Hiba, Elmekiesse, Cohen - Tax Solutions Ltd.

Tel: 03-6134111, Fax: 03-6133113

Step Annual conferance 2016

Economy & Finance

Transcript of Step Annual conferance 2016