04.11.2009

It was like a Hollywood cliffhanger. Less than one day before various trust tax returns and elections were due to be filed, the Israel Tax Authority shifted the deadline.

Consequently, the deadline for filing trust tax returns for 2006-2008 has been moved from October 30 to December 31, 2009. This also applies to the amnesty for pre-2006 trusts.

Since the new trust regime was introduced in 2006, the reporting deadline has been repeatedly extended every three to four months.

The tax authority also issued a position paper on trusts dated October 26, 2009. Here is an overview.

Distributions in 2002-2005
The position paper reminds us of an old provision in force regarding the 2002-2005 tax years.

Israeli residents who received trust monies of more than NIS 100,000 – or who were beneficially entitled to trust monies, directly or indirectly – had to file an Israeli tax return giving details, even if they were not taxable. It wasn‘t clear whether potential beneficiaries – depending on the future discretion of the trustees – had to report or not. The tax authority‘s position paper acknowledges the unclear wording of the law. But as a ‘‘concession‘‘ it requires Israeli residents who actually received a distribution from a trust, in the period 2002-2005, in cash or in kind, to report this on a tax return or on Tax Form 149 by December 31, 2009.

Nominee vs trustee

Very helpfully, the position paper clarifies that a nomineeship is not considered to be a trust. Therefore, a nomineeship is outside the scope of the new trust-tax regime.

For example, suppose you ask your lawyer to buy a parcel of land in his name for you; he is probably your nominee. Walt Disney apparently bought up a lot of land cheaply in Florida in this way. The position paper cites the Agency Law of 1965 and points out the following differences between a nominee and a trustee of a trust: (1) A trustee owns the assets concerned, a nominee doesn‘t; (2) A nominee can only do what he is required or entitled to do without applying discretion, unlike a trustee; (3) A nominee is obligated to his principal; a trustee is obligated to the beneficiaries; (4) A nominee must follow the instructions of his principal, which can be changed or terminated; a trustee is not limited to the instructions in the trust deed; (5) A nomineeship ends upon the death of the principal or the nominee; a trust continues beyond the death of the settlor (grantor) or the trustee.

Where a nomineeship exists, the principal presumably remains the taxable party, but the position paper didn‘t spell this out.

Exchange rates

Until the end of 2009, year-end exchange rates may be used. Commencing January 1, 2010, the position paper expects trustees of an Israeli residents trust or an Israeli-resident testamentary trust (as defined in detail in the tax law) to translate every trust transaction and balance to new Israeli shekels according to Bank of Israel representative exchange rates. This must be done according to detailed regulations known as Income Tax Rules (Conversion to New Shekels of Amounts Originating Outside Israel), 2003. For trustees abroad, this may mean rewriting their accounting records.

The amnesty

The position paper expands an amnesty offer for pre-2006 trusts first announced by the tax authority on June 23, 2008.
The original amnesty enables pre-2006 irrevocable Qualifying Trusts (as defined in detail) to pay tax at a rate of only 4 percent to 10% (usually 6%) of their value at the end of 2005 to clear any past Israeli tax exposure and ‘‘step up‘‘ the cost carried forward. The amnesty can be applied to some or all trust assets. No foreign tax credit is allowed.
On December 18, 2008, the tax authority clarified that the amnesty applicant may choose between the exchange rate at the end of 2005 or on the date of signature on the amnesty agreement. Any tax due according to the amnesty or tax returns for 2006 and 2007 will bear interest and indexation (inflation adjustment) from June 30, 2008, until the date the tax is paid.

The position paper recognizes that some asset values have declined since the end of 2005. Consequently, the amnesty choices have now been expanded:

* No amnesty

* The original amnesty offer as above

* The ‘‘linear approach‘‘ for selected assets: when such assets are sold, split the sale consideration pro rata to the time before and after December 31, 2005. The portion before that date is taxed under the original amnesty rules. The portion after that date is taxed under the new trust-regime rules. If a selected asset is not sold by December 31, 2011, it will be deemed to be sold and the trustee will have to provide a valuation then.
If desired, the amnesty must be elected by December 31, 2009. If the linear approach is preferred, it seems the ‘‘selected assets‘‘ must be selected by that date even if they are sold subsequently. Since few, if any, of us can predict the future, electing the amnesty seems to be a gamble.

For selected assets sold in the years 2006-2009, at least eight different comparative sets of calculations may be prepared, before deciding about the amnesty.

Moreover, an irrevocable discretionary trust located entirely outside Israel was often considered to be outside the Israeli tax net before 2006, making an amnesty election less than necessary.

The last word

The position paper reminds us that a more detailed tax circular about trust taxation is on the way.

As always, consult experienced tax advisors in each country at an early stage in specific cases.
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Leon Harris is an international tax specialist at Harris Consulting & Tax Ltd.