An update on the taxation of trusts in Israel

Abstract

The taxation of trusts was part of an overall tax reform in Israel which revised the tax system from territorial taxation to personal taxation in 2003. Due to the complexity of the topic, a special committee was appointed—the Committee for the Taxation of Trusts (the ‘Committee’)—to recommend on the manner in which trusts should be taxed in Israel. Headed by Ms Frida Israeli, CPA, a senior officer of the Tax Authority, the Committee's members included public servants and senior practitioners from the private sector, including Meir Linzen, Advocate, Alex Hilman, CPA and Alon Kaplan, Advocate. The Committee's recommendations formed the basis for the Taxation of Trusts Law, effective as of 1 January 2006 (the ‘Law’). The Law defines a number of different categories of trusts. For the purposes of this article, we will broadly mention only the foreign settlor trust and the Israeli resident trust. As a basic principle, income of the foreign settlor trust is not taxable in Israel and income of the Israeli resident trust is subject to tax and reporting obligations in Israel.