preface

8.5. TAXATION OF TRUSTS
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TAXATION
8.5.1. Prior to the tax reform implemented in 2006, the issue of trusts was
clouded with uncertainty due to lack of specific classifications and
regulations. Thus, foreign investors approached this particular structure
with great apprehension, if at all.
8.5.2. Under the said tax reform, clear and concise conditions have been
specified, on the basis of which foreign and domestic investors may
determine the appropriate category of the trust to be set up, to meet their
particular needs.
8.5.3. In addition, under the new regulations an Israeli trustee can manage a
foreign trust without the need to report its income to the Israeli tax
authorities. Needless to say, the foreign trust’s income is generally not
taxable in Israel.
8.5.4. Foreign resident trust
8.5.4.1. As opposed to Israeli resident trusts, two main categories exist
for a trust to be considered foreign resident, with different tax
implications in each case:
♦ “Foreign Resident Settler” Trust - A trust, whether
irrevocable or not, will be considered foreign resident if,
during the relevant tax year, all its settlers and beneficiaries
are foreign residents, or at the time of its establishment and
the relevant tax year all its settlers are foreign residents,
irrespective of the beneficiaries' residence.
♦ The tax implications - There are no tax liabilities when assets
are transferred to the trust. Assets transferred from the trust
to the beneficiaries will be considered as if transferred
directly from the settlers to the beneficiaries and taxed
accordingly (as such, there will be no tax liability for Israeli
and foreign beneficiaries). The trust’s income will be taxable
whether or not transferred to the beneficiaries, as if it were
the foreign settlers’ income (even if the beneficiaries are
Israeli residents). As such, income generated outside Israel
would not be taxable nor would it need to be reported in
Israel.
BDO Israel