On 13th June, 2013 we issued a client circular regarding a proposed reform in the taxation of New Immigrants in Israel which is included in the Bill for the Change of National Priorities (Legislation Amendments for Achieving the Budget Purposes for the Years 2013 and 2014) (the "Bill"). The Bill suggested significant changes to the exemptions provided to New Immigrants and Long Absent Returning residents ("New Immigrants"), including: (i) imposing reporting obligations on New Immigrants; (ii) determining that certain dividends which are distributed by foreign companies from Israeli source income will be considered as Israeli source income and will be subject to tax; (iii) determining that certain companies that are held by New Immigrants together with Israeli persons will be considered as CFCs and Foreign Occupation Companies; and (iv) significantly narrowing the exemptions provided to trusts of New Immigrants.
We are pleased to inform you that due to our efforts as well as the efforts of others, the above changes which sought to limit the benefits provided to New Immigrants in Israel have been carved out of the Bill and will be dealt with in separate legislation at a later date. The only change which remains in the Bill that is relevant to New Immigrants, deals with the taxation of trusts of New Immigrants. However, even in this area, the Finance Committee of the Knesset agreed to make significant changes (the Finance Committee is expected to vote on these changes on Wednesday and Thursday of this week).
Under current legislation, a trust which was settled by a New Immigrant is entitled to the same tax benefit to which the New Immigrant is entitled (i.e. 10 year exemption on its foreign source income). These benefits are currently provided even if the beneficiaries are Israeli residents that are not entitled to these benefits.
According to the Bill, a trust which was settled by a New Immigrant will be entitled to the benefits of New Immigrants (i.e. 10 year exemption on foreign source income) only to the extent that all the beneficiaries of the trust are New Immigrants. As a result of the discussions held at the Finance Committee, it was agreed to modify the Bill as follows -
- It was agreed that the above provisions regarding the taxation of trusts of New Immigrants, will only apply with respect to trusts that were settled by New Immigrants who arrive in Israel after the date on which the law becomes effective and as long as such new immigrants are alive.
- A New Immigrant trust will also be entitled to the benefits provided to New Immigrants if some of the beneficiaries are foreign residents or New Immigrants.
- The Bill was emended to provide the Israeli Tax Authorities (“ITA”) with the authority to enact regulations, subject to the confirmation of the Finance Committee, which will enable the allocation of the income of the trust to New Immigrant beneficiaries.
- The amended Bill clarifies that to the extent that the New Immigrant benefits do apply as described above, they will continue even if the trust is set up after the settlor immigrates to Israel. This result is not clear under the current law, and has been clarified in a circular issued by the ITA's legal department. The ITA has now agreed to take this opportunity to clarify this issue as well.
It should be noted that there was no material change in the provisions of the Bill which provide that if a trust was settled by a foreign resident and has New Immigrant beneficiaries, the portion of the trust income attributable to New Immigrant beneficiaries will be entitled to the New Immigrant benefits.
The amendments to the trust tax regime in Israel shall apply beginning on January 1, 2014 (the "Effective Date") and not August 1, 2013 as was initially intended.