Step Annual conferance 2016

Artzi,Hiba,Elmekiesse,Cohen
www.ahec-tax.co.ilwww.ahec-tax.co.il
1
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 Planning
Risks and Opportunities

www.ahec-tax.co.il 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

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

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)

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

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

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

“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“?

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

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;

13
An Israeli trust forever?

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

Section 75(I) of the ITO was changed in Amendment 197, to the effect that
effective from the 2014 tax year it no longer relates to a “Foreign Resident
Settlor Trust” (which no longer exists) but a “Foreign Residents Trust”;
The section enumerates four possibilities for a trust to be considered a
Foreign 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"

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"

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);

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?

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

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

Section 75N(B) states: “If an Israeli residents trust whose
settlors have all died before the tax year, and after the
distribution of its assets, losses remain in it…, the losses will
be 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's
assets to the beneficiaries. Accrued losses that remain in the
trust will also be "transferred" to the beneficiaries, thus
allowing the inheritance of losses.
The elimination of the trust in the death year will prevent the
ability of inheritance of losses!
The rule after the father’s death

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Use of the “Israeli” status of
a trust

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

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

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

www.ahec-tax.co.il
Thank you
27
Ran Artzi, CPA - Managing Partner
artzi@ahec-tax.co.il
Artzi, Hiba, Elmekiesse, Cohen - Tax Solutions Ltd.
Tel: 03-6134111, Fax: 03-6133113

Step Annual conferance 2016

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Step Annual conferance 2016