The Tax Authority issued regulations on Sunday imposing taxes for the first time ever on foreign trusts as part of its campaign to tackle the black market and tax evasion.
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The new rules, which go into effect retroactive to January 1, will tax all trusts established up to the end of last year by people residing abroad if the beneficiaries of the trusts are residents of Israel. Until now, income generated from assets held by foreign trusts was not taxed in Israel unless an Israeli beneficiary had an active role in managing the trust and distributing the benefits from it. Officials said they expected the new regulations would generate hundreds of millions of shekels a year in revenues for the government, if not more.
The new rules mark a dramatic step as Israel’s Tax Authority cracks down on what it sees as increasingly creative tax avoidance. Its director, Moshe Asher, is engaging in a multifacted drive that encompasses everything from using databases to track down tax cheats by monitoring their spending to expanding reporting requirements to include more taxpayers. The government is also looking for ways to discourage the use of cash, which is often used for under-the-counter transactions.
Not only was the Tax Authority concerned that the trusts were creating a tax loophole, it also sought to equalize the tax treatment between people receiving benefits from abroad through a trust and those in Israel who get a direct gift from someone abroad, which has been subject to tax.
The new policy also contains transitional provisions based on the extent of a beneficiary’s influence over a foreign trust. This was put in place in light of the fact that although the law previously imposed taxes on Israelis who were involved in managing foreign trusts, there had been problems identifying which trusts come within the scope of the regulations as well as problems in proving that any tax was owed.
The new regulations provide for three categories of trusts, each of which is taxed at rates ranging from a third to half of the income generated by the trust, although the rate can climb to as high as two-thirds during a specified period. Taxpayers will also be given the option of paying a 3% to 6% tax on the total assets of the trust, rather than the income generated from it.
As part of the transitional regulations, trustees will be allowed to establish a new cost basis and new acquisition date for the purposes of calculating the taxes they owe, under certain circumstances.