Trust Taxation in Israel
Taxation of a Trust with an Israeli Resident Beneficiary
There are trusts operating worldwide that have a settlor or a beneficiary who is an Israeli resident.
Trusts are generally used to regulate the relationship between the settlor of the trust and their assets, and their heirs.
It is worth noting that Israel has no inheritance tax, whereas most countries in the world have inheritance and gift taxes.
In some cases, the taxes in those countries are very heavy.
There are several types of trusts, including a “Trust with an Israeli Resident Beneficiary.”
A Trust with an Israeli Resident Beneficiary is a trust in which, 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 Israeli resident. [Section 75H1(a) of the Ordinance]
This trust is subject to the provisions applicable to an Israeli Resident Trust; therefore, there is no difference between an Israeli Resident Trust and a Trust with an Israeli Resident Beneficiary in terms of taxation. [Section 75H1(c) of the Ordinance]
Technical details:
Since, for income tax purposes, there is no difference between an Israeli Resident Trust and a Trust with an Israeli Resident Beneficiary, the trust will be required to open a trust file in Israel, in a specific department.
The trust must be registered in the Trust Register, after which a file must be opened for that trust.
There are two types of files for trusts:
A. Active file (file type 45) – opened for a trust that is required to submit annual returns for its income.
B. Inactive file (file type 46) – opened for a trust that, according to the provisions of the Ordinance, is not required to submit annual returns for its income, and in which documents and notices required under the Ordinance will be filed.
Types of industries in trust files:
- Sector 6728 – “Auxiliary Activities for Financial Intermediation”
- Sector 7002 – “Rental and Management of Real Estate Assets”
The trust fund is required to report its income to the Israel Tax Authority using Form 1327.
Section 131(c1) of the Ordinance stipulates a requirement to provide details related to the trust for which an annual return is submitted.
Form 151H is intended for the provision of these details and will be submitted as an appendix to the annual return (submitted using Form 1327).
Tax procedures in Israel:
The trust fund is liable for tax in Israel, as the provisions applicable to an Israeli resident apply to it for tax purposes.
Therefore, it is liable for tax on all of its income, whether derived in Israel or abroad.
Regarding the share of the Israeli beneficiary:
The tax applicable to the trust fund will be the same as the tax rate applicable to an individual
Israeli resident [Section 129C(a)(2) of the Ordinance].
On the trust’s taxable income in the tax year, the tax rate will be according to the brackets specified in the section [Section 121 of the Ordinance].
Income from the rental of a residential apartment in Israel will be taxed at a rate of 10% [Section 122 of the Ordinance].
Income from the rental of a residential apartment abroad will be taxed at a rate of 15% [Section 122A of the Ordinance].
Income from dividends will be taxed at a rate of 25% [Section 125B of the Ordinance].
It is possible to offset tax paid in respect of the trust’s income, whether distributed or undistributed, against the tax payable on it in Israel.
[Sections 204(a), 204(b), 204(c) of the Ordinance]
An Israeli resident beneficiary receiving a distribution from the trust will be entitled to a credit for any Australian tax paid by the trustee in the trust, up to the credit ceiling for ordinary income, and up to the amount of tax applicable in Israel (had it been taxable in Israel) on non-ordinary income, in respect of the distribution.
Offsetting Australian tax payments against Israeli tax [Section 205A(a) of the Ordinance]:
If the credit granted (Australian tax) is higher than the amount of tax applicable in Israel on that income in that year, and an excess credit is created, it may be offset over the next 5 years, adjusted according to the rate of the Consumer Price Index increase.
