Step conference eng 1 7-2015 final

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www.ahec-tax .co . i l

STEP CONFERENCETrusts as a Tax Planning

Instrument

Artzi, Hiba, Elmekiesse, Cohen - Tax Solutions

Ltd.

23.06.2015 1

Ran Artzi, CPA - Managing Partner

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1. An endowment to a trustee in a trust is not classified as a sale as

long as the settlor and the beneficiary are the same, and the

principle of tax continuity is maintained - Section 3 of the real estate

taxation law (the “Law”).

2. There is no correlation between the definition of a trust in the Income

Tax Ordinance (the “Ordinance”) and between the Law.

3. Sections 74 and 73(F) of the Law set the rules regarding the

announcements with respect to a trust.

This means that the transfer of real estate from the existing owner to a

trust in favor of a beneficiary, who is not the owner, is a tax event under

the Law.

Real Estate Taxation Law

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Endowment to a trustee, guardian, etc.

3 Endowment of right to land or a right in an association to a trustee,

guardian, liquidator or receiver pursuant to the Bankruptcy Ordinance,

1936, the Companies Ordinance, the Cooperative Societies

Ordinance, the Trading with the Enemy Ordinance, 1939, the

Absentees Properties Law, 1950, or the Germans Properties Law,

1950, or to a company as defined by the Assets of the Holocaust

Victims Law (Restitution to Heirs and Endowment for Purposes of

Assistance and Commemoration), 2006– is not “sale of a right to land”

or an “act in an association” for the purpose of this law; and in the sale

of a right to land or an act in an association by a person to whom it

has been endowed as set forth, the calculation of the tax, including

pursuant to Section 7A, will be as though the right had been sold or

the act performed by a person from whom it was endowed.

Real Estate Taxation Law –

quotation of relevant sections

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Announcement of a trust:

74. Any person who purchases in his own name for a given person a

right to land or a right to a property association, will inform the

Director, in the form prescribed by the Director has, within thirty

days of the day of purchase, that he has purchased the right in his

own name for another person, and once announcing this he will be

considered as a trustee for the purpose of Section 69.



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Declarations

73. (F) Any person who possesses in his own name for an unidentified

another person a right to land or a right to a property association,

and any person who possesses a power of attorney to register a

right to land to the name of the buyer or to his order, will inform the

Director, notwithstanding the provisions in any law, of the sale of the

right to the land or the action in the property association resulting

from which he will possess that right or the power of attorney for

another person, within thirty days of the date of him being given a

notice of that sale or action, unless that sale or action is not taxable

pursuant to this law; the foregoing does not diminish from the duty

under Subsection (A).



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Example:

Parents requesting to transfer 2 apartments to their 2 daughters who

have reached the age of 20 and are unmarried.

The parents request that the apartments will not to be transferred

directly to the daughters but to a trust.

In addition, the needs of each of the sisters in the future are unclear.

Apartments that have been received from the parents as a gift can’t

be exchanged between the sisters under an exemption from

betterment tax and from purchase tax.

According to the trust’s deed, the apartments may be attributed to

each of the daughters in equal shares, or each apartment may be

attributed to a specific daughter. The apartments will be registered

under the trustee’s name in the land registrar office


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The solution:

Establishing a trust – transferring the apartments to a trust will be considered

as a gift from the parents to the daughters, and therefore:

1. It is exempt from betterment tax – Section 62 of the Law will apply.

2. Purchase tax will be paid – 1/3 of the ordinary purchase tax.

3. The trustee will have the full discretion to decide, in accordance with the

needs of the daughters, which apartment will be attributed to each of the

daughters for their usage.

4. The apartments’ occupancy by the daughters will not be subjected to rent

charges since, for betterment tax purposes, the daughters are considered

as the owners of the apartments.

5. Provisions may be determined – how the apartments will be sold and the

proceeds be distributed between the daughters or the exchange of the

apartments between the daughters (exchange in the usage, otherwise

differences in the registration of the apartments in the land registrar office

will be subject to betterment tax and purchase tax).


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The solution - continued:

Upon the sale of the apartments to third party, the provisions of tax continuity

will apply, even though 1/3 of the purchase tax was paid by the daughters.

The parents’ ownership period of the apartments will be considered as

ownership of the daughters upon the sale of the apartments.

In such a case, the transfer of the apartments to the trust may allow to

withstand the estate tax and gift tax, if such laws will be legislated.


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Section 125C(D)(3) of the Ordinance states that a loan granted by an

individual who is a substantial shareholder (10% or more) in a company, as

defined in Section 88 of the Ordinance, will be subject to the marginal tax

applying to such individual (up to 48% today), instead of a tax rate of 25%

that apply to interest income, or a tax rate of 15% applying to interest income

originating from a loan that is not index linked (an additional 2% surtax may

be applicable in all cases).

The provision above also applies to the relative of an individual who is a

substantial shareholder in the company, even if such relative holds less than

10% in the company or holds no shares at all, in view of the definition of

“substantial shareholder” to which Section 125C of the Ordinance refers.

Thus, if the brother of the individual (hereinafter – “the Brother”) grants a loan

to a company, he will be taxed with the marginal tax rate because he too (the

Brother) is considered as a substantial shareholder.

Restricted tax rates for interest on loan

that is granted within a trust structure

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10

Company

Individual

100%

Brother

Loan

granting

Interest with respect to both of the loans is subject to the marginal tax rate

Loan

granting

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Company

Individual -

Settlor and

beneficiary

100%

Brother

Loan

granting

Interest with respect to both of the loans is subject to the marginal tax rate

Loan

granting

Trust

100%

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Israeli Company

IndividualBrother –

Settlor and

beneficiary

100%

Loan

granting

relatives

trusteenot

relatives

relatives

Trust

X

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Instead of the Brother granting a loan directly to a company that is held by the

individual (who is his relative), the Brother’s existing trust, in which he and his

family are the beneficiaries, will grant a loan to the company.

The trustee in the Brother’s trust is considered to be a relative of the Brother, but

not a relative of the individual.

One can raise the argument that since the Brother is a relative of the individual,

and the trustee in the Brother's trust is a relative of the Brother, than the trustee

in the trust is also a relative of the individual.

This arguments has no standing in the wording of the law, and this is not the

purpose of the law (otherwise all the people of Israel are brothers) and secondly,

in a recent published taxation decision (# 4938/14) discussing the issue of family

relation in relatives’ trusts, the Israeli Tax Authority (“ITA”) stated that even

though an individual is a relative to his brother, and the brother is a relative to his

spouse, the spouse is not a relative to the individual. With this decision the

ITA adopted an approach that rules out this argument and supports the

interpretation above.



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Therefore, in the case described above, interest income derived from a

loan granted by the trustee of a trust that the Brother has established,

in our view, is subject to tax at a rate of 25% or 15% rate, as the case

may be, and not at the marginal tax rate that would apply in the case of

a direct loan (an additional 2% surtax may be applicable).



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The use of Section 75G(G) – distributions

to beneficiaries

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Father –

Foreign Settlor

Son –

Israeli BeneficiaryDaughter - new Immigrant /

Long term or regular returning resident at

2012 (“qualified individual”)

Beneficiary

Trust

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Assumptions

1. The trust income derives from abroad.

2. The trust is classified as a relative trust.

Taxation:

1. Trust’s income which is attributed to the Israeli beneficiary or distribute to

him will be taxed according to the applicable provisions of the Ordinance

(25% or 30% according the selected track).

2. Trust’s income which is attributed to a qualified individual or distribute to

him will be exempt from tax according to the benefits grated by law

(within the benefits period).

3. According to the wording of the Ordinance, section 75G(G) does not

aplly to relative trust.

The use of Section 75G(G) –

distributions to beneficiaries

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The use of Section 75G(G) – distributions

to beneficiaries

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Father - Settlor

(immigrated to Israel during 2015)

Son –

Israeli Beneficiary

Trust

Daughter – Qualified

individual at 2012

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Consequence – the trust is classified as an Israeli resident trust, from the

date the settlor became an Israeli resident.

Taxation

1. The trust is taxed according to section 75G, which sets the provisions

applying to Israeli residents trust, including possibility to attribute the

revenues to beneficiaries who are Israeli residents, up to the amount

distributed to them within 6 months from the end of the tax year.

2. The trustee is not eligible to benefits granted to the settlor who is an

qualified individual, because one of the beneficiaries in the trust is not

qualified individual (i.e. the son who is just a regular Israeli resident).

3. Only if all the beneficiaries (the daughter and the son) and the settlor

(the father) are qualified individuals, the trust’s income will be exempt

from tax according to the benefits grated to a qualified individual.



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Solution

1. Since section 75G applies to the trust’s income, the trustee and the

beneficiaries may elect, each year, to be taxed according to section

75G(G) to the Ordinance.

2. Section 75G(G) sets the possibility to attribute the revenues to

beneficiaries who are Israeli residents, up to the amount distributed to

them within 6 months from the end of the tax year.

3. Thus, under such election, and provided that the other conditions in

section are satisfied, all qualified distributions to a beneficiary who is a

qualified individual (i.e. the daughter) are subject to the benefits granted to

qualified individual.



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The formation of such a mechanism will also assist in the case when

having in an Israeli residents trust beneficiaries whose remaining

benefit period is greater. In other words, distributions will be made

first to the beneficiaries whose benefit period is about to end and only

in the following years to those who are still entitled to benefits.

Generally speaking, the section helps to average out and to maximize

the tax benefits of the family fortune that is managed by a trust that

fulfills the definition in the section. The trustee may also be able to

distribute certain revenues to certain beneficiaries with consideration

of the tax rates applying to them, exemptions to which they are

entitled and offsettable losses that have been accumulated for them.



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Thank you

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Ran Artzi, CPA - Managing Partner

[email protected]

Artzi, Hiba, Elmekiesse, Cohen - Tax Solutions Ltd.

23.06.2015

Documents

Step conference eng 1 7-2015 final