The Income Tax Commission team that is looking into the taxation of trusts intends to recommend that the matter be codified into legislation instead of being governed by internal regulations, according to Deputy Tax Commissioner Oscar Aburazek, who is also a member of the team.
The significance is that legislation leaves much less room for negotiation.
The issue of trusts is being addressed now to close a loophole that Israelis might try to use to evade taxes following the country's recent switch from territorial to personal taxation. A trust is a legal arrangement in which an individual (the trustor) gives fiduciary control of property to a person or institution (the trustee) for the benefit of the beneficiaries. In an irrevocable trust, the trustor effectively parts with his money. The concern, however, is that Israelis would set up revocable trusts and simply wait a few years in the hope of finding a way to evade the tax, or else try to withdraw the money in convoluted ways.
The tax reform bill that was passed into law on July 24, which becomes effective in January 2003, covered most aspects of the transition from territorial to personal taxation. However, the issue of trusts was left untouched. The bill included only one provision on this matter, requiring trusts to be registered - which until now they were not.
In a seminar that took place on this subject on Monday, Aburazek said that most of the off-shore trusts established to date were revocable, and are thus taxable. The law should address cases in which the trust does not distribute revenues, he said.
Avi Alter, one of the members of the Rabinowitz Committee that drafted the tax-reform law, said that Israelis who transfer funds to off-shore trusts expecting to collect them again tax-free within a few years are wrong. They will not only have to pay the taxes due, but also a penalty, he said.
Israel Strauss of the Institute of Certified Public Accountants in Israel said that because of the costs involved (trustee fees, for example), it did not make sense to set up a trust of less than $10 million. The president of the institute, on the other hand, said that it could be profitable even with less than $5 million.