Developments In Israel And Its Trusts Laws

Alon Kaplan

MMG Kaplex Trust Company (1978)

28 January 2013

Editor’s note: Israel has been in the headlines for geopolitical reasons in recent weeks and a week ago, the country held national elections. Away from such issues, however, the country’s development as a financial jurisdiction continues. A senior figure in Israel's legal profession, Alon Kaplan, managing partner, Alon Kaplan Law Firm, and his colleague, Mrs Lyat Eyal, senior partner, look at recent developments. (Kaplan is also chairman of MMG Kaplex Trust Company (1978).)

Trusts and the treatment of trusts have evolved a good deal in Israel in recent years. For an example of a previous article by Mr Kaplan, a prominent member of the Society for Estate Practitioners (STEP), on the issue, click here. As ever, this publication welcomes readers who respond with queries and comments.

The International Tax Department of the Israeli Tax Authority issued a Tax Ruling confirming a company as an underlying company of a trust in accordance with Section 75c of the Tax Ordinance.

Facts

1. A foreign settlor trust was established by a non-resident of Israel pursuant to Amendment 147 of the ordinance.

2. All of the settlors and beneficiaries of the trust are non-residents of Israel.

3. The trustee is an Israeli resident and the trust opened a file with the Israeli Tax Authority.

4. The trustee incorporated an Israeli underlying company for the sole purpose of holding and managing the trust assets for the trustee. Said underlying company is not permitted to conduct any business or manage assets other than the trust assets.

The Tax Authority decided as follows:

1. The underlying company is categorised as an underlying company within the scope of the ordinance from the date of incorporation.

2. The trustee may not change the categorisation of the company as an underlying company.

3. In accordance with the tax ordinance, the underlying company is not obligated to file reports.

4. For tax purposes, tax rates, deductions and exemptions, the income of the underyling company is to be the income or loss of the trustee. Transfers of assets by the trustee or the settlor to the underlying company will not constitute a sale pursuant to the ordinance.

5. Profits distributed by the underlying company to the trustee will not constitute a taxable event.

6. The settlement of assets into the underlying company will be considered settling of the assets into the trust.

7. This ruling does not review the jurisdiction of the trust.

8. The underlying company is not considered a resident of Israel for tax purposes and is not entitled to confirmation form the tax authority as to its status as an Israeli company.

9. This ruling is only relevant to the underlying company. It is agreed that the trustee may apply for additional rulings for the purpose of establishing additional underlying companies.

10. This ruling includes additional terms and restrictions which have not been published.

Note: the term 'underlying company' relates to a company the sole purpose of which is to hold and administer assets for a trust. This was defined by the legislation for the Taxation of Trusts 2005.