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Dramatic Decision on the Taxation of Trusts in Israel

A new Tel Aviv District Court decision dramatically changes the taxation of trusts in Israel. The decision rejects the Israel Tax Authority’s position on the conveyance of real estate properties to trusts.  


The decision considers a matter involving Canadian residents who established a trust for their Israeli granddaughter. The Canadian residents also conveyed several real estate properties in Israel to the trust without consideration. 


In their report to the Israel Tax Authority, the Canadian residents claimed that under the Income Tax Ordinance (ITO), this trust should be classified as an “Israeli Resident Trust” or an “Israeli Resident Beneficiary Trust”. Such classification would mean there was no taxable transaction in the conveyance of the property to the trust. 


The ITA maintained, however, that such conveyance is subject to the Real Estate Taxation Law and is viewed as the sale of a right in land. It is therefore subject to purchase and betterment taxes, similarly to the conveyance of real estate to a beneficiary. 


The Tel Aviv District Court’s Appeals Committee rejected the ITA’s position. It found there is no distinction between the conveyance of assets, be they real estate in Israel, real estate abroad, or just stock. Therefore, in accordance with section 75 of the ITO, the conveyance of real estate properties to a trust of Israeli residents without consideration does not constitute a “tax event.” 


Additionally, the Appeals Committee emphasized that not only does the conveyance of a real estate property to a beneficiary not constitute a “tax event,” but also that the changing of beneficiaries of the trust does not constitute a “tax event,” as long as the trust assets have not been distributed. This contradicts the ITA’s position, both as expressed to the Appeals Committee and as reflected in the above circular. 


The Appeals Committee decision dramatically alters the possible avenues to take for the correct tax planning of trusts.


Now, it will be interesting to see if the ITA appeals this decision (which is likely). If so, how will the Supreme Court rule on the issue?



For more information, contact a member of our Tax team.



Tags: Out-Of-Country Residents | Real Estate | Tax Event | Trusts