On December 25, 2014, the Israel Tax Authority (the "ITA") officially extended the deadline for certain reporting requirements concerning so-called "Family Trusts" in Israel. The previous deadline was December 31, 2014. The new deadline has now been extended to June 30, 2015.
A Family Trust, under Israeli tax law, is a trust with the following two features:
- The settlor is a living non-Israeli resident and the trust has at least one Israeli beneficiary. For this purpose, the settlor of the trust is considered living if the spouse of the settlor is still alive and the couple was married at the time of a contribution to the trust.
- The settlor and the Israeli beneficiaries are relatives. For this purpose, parents, children, spouses and grandchildren are automatically considered relatives; other more distant relatives must convince the ITA that the trust was settled in good faith and that no consideration was paid by the beneficiary for his or her beneficial interest.
The category of Family Trusts came into existence following a major reform to Israeli tax law in August, 2013. This reform, largely, became effective as of January 1, 2014.
Very generally, Family Trusts are taxed under one of the following two alternative tracks:
- A 30% tax on the "profit" component of distributions to the Israeli beneficiaries. This is the default track, and if no election is timely made, the Family Trust will be subject to tax in this manner.
- A 25% tax on the current income and gains attributable to the Israeli beneficiary. A Family Trust must submit a one time, irrevocable election to apply this track.
In addition, Family Trusts are required to submit a one-time notification of their existence to the ITA.
For trusts that existed prior to January 1, 2014, the extended deadline will effectively require that both (i) the 25% taxation of current income track election (if applicable); and (ii) the notification of the Family Trust's existence be submitted by June 30, 2015.
However, two additional factors should be noted. First, if a trust enters into an agreement for a transitional settlement arrangement with the ITA, then the reports must be submitted together with the signing of the agreement.
Second, if the ITA grants an extension to a trust for submitting the 2014 tax return, the trust may submit the reports until the date of the extension, but no later than December 31, 2015.
For a more detailed review of the reform to Israel's taxation of trusts click here.
For our earlier circular describing the forms that will need to be submitted click here.