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21 December 2015

2015 year-end tax planning

With the end of the tax year fast approaching, here are a few tips that may be relevant:

  • If you haven't already done so, make a claim for the Working Tax Grant (negative income tax) in respect of 2014 income. The deadline is Friday 25th December.

  • If you are a business with inventory, take a count as close as possible near the year-end. The cost of each item should be listed alongside the quantities.

  • If you pay Bituach Leumi without usng a standing order, pay by the end of the year in order to receive the deduction for tax purposes. (Those paying on standing order will have the January payment included in the 2015 certificate)

  • Make donations to recognized charities (section 46), and ensure the receipt is dated 2015.

  • Start collating information for "short" tax returns, if relevant:
    • Israeli property income taxed on the 10% route must be reported and the tax paid by 30 January 2016.
    • Foreign property income taxes on the 15% route and foreign interest, dividends and/or capital gains must be reported and the tax paid by 30 April 2016.

  • For business owners, consider whether you need to increase the amount you need to pay on account for both income tax and bituach Leumi. If you don't, expect to pay interest on the extra payments once the tax return is eventually filed. For Bituach Leumi, this will mean letting them know that you wish to increase by the end of the year. For income tax, voluntary payments can be made anytime. Interest is fully waived on payments made in January. 50% is waived on February payments and 25% is waived on March payments.

7 December 2015

Information exchange

The latest amendment to the tax law was publicized last week. Among the sections included in the new law was a section dealing with the circumstances in which the Israeli Tax Authority is permitted to exchange information with other tax authorities across the world.

Without going into the details of the law, suffice to say that we can expect the flow of information to start in the relatively near future (likely 2017, 2018 onwards), and those who have hitherto unreported income – specifically in foreign countries – are ever-more likely to become exposed.

It goes without saying that a person coming forward to the tax authorities ahead of them getting a knock on the door in the middle of the night is in a far superior position. And so, I would urge anyone who has any concern that they have income not reported to the Israeli tax authority to do so, and do it soon.

If you are unsure if income needs to be reported, see the previous post regarding who needs to file a tax return.

Further, for those who have an issue, it is worthwhile considering entering the Voluntary Disclosure Procedure – see more details here.

Contact me today (details on the side of the blog) to discuss your personal circumstances and how best to "come clean."

15 November 2015

Taxation of trusts, part 8 – taxation issues

As we have seen previously in this series, tax is levied in Israel in one way or another wherever there is at least one Israeli resident in the picture of a trust (with the potential exclusion of those within their 10-year exemption for new or returning residents).

The next few posts will look at some of the potential tax traps that can occur as a result of this legislation. Whilst it may not be possible to get around these issues with trusts that are already in existence, for those trusts that are in the process of being settled and worded, it is extremely important to take expert advice BEFORE matters go into practice so as to ensure that the tax consequences do not undo the overall aim of the trust.

Different taxpayers and double taxation
A basic tenet of international tax rules is that tax is not paid twice on the same income. And therefore, if Israel wants to tax an individual on (for example) dividend income earned overseas, a credit for the tax borne in the other country will be given against the tax due on the same income in Israel.

In certain countries (e.g. USA, UK), trust income that is distributed to a beneficiary is taxed in the hands of the beneficiary only, and not in the hands of the trust. As we have seen though, Israel's default position is to tax the income of the trust at the trust level, although in certain circumstances the income can be wholly attributable to either the settlor or the beneficiary. In these cases, there may well be situations whereby the same income is being taxed in the hands of someone different in each country. The tax authorities could therefore turn around and argue that no credit can be given for tax borne in the foreign country since the specific taxpayer in Israel did not bear any tax on this income abroad.

At present, there have been no regulations in Israel published regarding relief from double taxation in such circumstances. Therefore, if a stance is to be taken to claim the tax paid by a different taxpayer on the same income, full disclosure must be made to the tax authority.

The most obvious solution to this issue is to ensure that the incomes are taxable in the hands of the same taxpayer in each country. Practically though, this may not always be possible or even advisable (due to high tax rates)

Revocabilty of a trust

This can be a classic example of where there are issues.  As we have previously seen, a trust cannot be considered irrevocable if there is a family relationship between the settlor and the trustee.

Consider the following (real-life) example:
Non-resident parent passes away. As part of the will, a trust is established for the benefit of the Israeli-resident child, funded by their portion of the inheritance. The reason a trust is established is to ensure that the funds are put to good use (e.g. studies, housing etc.). However, the parent sufficiently trusts their child, and the child is appointed as sole trustee of the trust.

As such, the trust is considered an Israeli resident trust and is also considered recovable under Israeli tax law.

Since the settlor is deceased, the settlor cannot pay the taxes on the income, and so the trust pays the tax itself. Under certain conditions, the beneficiary can elect to tax any distributions of income made to them – but one of the conditions required is that the trust be considered irrevocable!

You might ask why this should make any difference – the trust and the beneficiary pay tax on the income at the same rate? The answer is two-fold. Firstly, the beneficiary may have unused tax credits that can be used to lower the taxes; there are no such credits at the trust level. Secondly, in this particular case at least, any income distributed to the beneficiary is taxed at the beneficiary level in the USA. And as such, we are back to the potential double-tax problem listed above.

My personal take – and I stress that this has not been approved by the tax authorities - on this sort of case is that such a trust is indeed considered irrevocable. Since the concept of revocability surrounds the ability of the settlor to take control of the assets in the trust once settled, I think it's fair to say that a deceased settlor is in no position to take control. Further it could be argued that a deceased person has no relatives – at least as far as tax law is concerned; again the logic being that a deceased person cannot exert any influence.

All said and done though, if this is applicable to you, contact me today in order to review your particular circumstances and how the taxes can best be handled.

26 October 2015

Tax authority suggesting that you might be eligible for a refund

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In a somewhat surprising move, the tax authority announced yesterday that they have sent out letters to approximately 1,700 people whom they think might be eligible for a tax refund in respect of the 2012 year.

This is of course a welcome move by the tax authority, but it is laced with danger. As we've previously discussed, there are numerous reasons why a refund might be due (see here for example). BUT, as the tax system is not simple, you may actually OWE money to the tax man, so be sure to seek advice first.

And it is important to remember that a refund claim is like filing a full tax return, and as such carries the same legal consequences if you fail to report everything.

If you think you might be eligible for a refund (for 2012 and/or other years), contact me today.

25 September 2015

VAT decreasing to 17%

The decrease in the rate of VAT (from 18% to 17%) is coming into effect on 1 October 2015. Prices need to be updated at that time.

How does this affect a business' reporting requirements?

With regards to expenses, ensure that you take the VAT as shown on the tax invoice (חשבונית מס) - there are some situations whereby a single invoice will have both the lower and higher rates of VAT charged. The most likely examples are your electric and telephone bills.

Onto income reporting.

For those businesses reporting on a monthly basis, nothing really changes as your income for the month of October will all be charged at the lower rate.

However, for those reporting every two months, the rate change comes in the very middle of the period, and so you will be reporting income charged at differing rates. The VAT authorities will not be able to do a proper check of your calculations, other than to check that the average rate falls out somewhere between 17% and 18%. From the actual average percentage they can work out (subject to rounding differences) the split between income charged at 17% and that charged at 18%. If you file online, you will be able to split out the income chargeable at each rate.

Overall, the change is not too difficult to handle, but if in doubt, contact me today.

21 September 2015

Three updates

Three stories of interest from the last few days:

(1) The threshold above which you can no longer remain an osek patur (see here) magically increased to NIS 100,000. And according to the tax authority website, this came into effect as of 1st January 2014! Needless to say that this has caught everyone by surpise; not least those who "upgraded" to osek morshe when their income went over the 80k limit. At this stage, there is no official word from the authorities about what to do in such a situation, but I would doubt that they would allow someone to revert to osek patur quite so quickly.

(2) The final date for applying for the Working Grant for 2014 incomes has been extended until Friday 25th December 2015. See here for more.

(3) Following the announcement a fortnight ago that the "anonymous" and "short" Voluntary Disclosure procedures were being extended (see here), the deadline for filing such a procedure is now 30th June 2016.

If any of this is relevant to you, contact me today.

6 September 2015

Voluntary Disclosure - extension of deadline for short or anonymous claims

At the very last minute, the tax authority announced today that they are extending the deadlines for the short or anonymous disclosures within the Voluntary Disclosure scheme. You can read more here.

At present, the revised deadline has yet to be announced, although my best guess is that it will be until either 30th June 2016 or 31st December 2016 (which is the deadline for the "regular" disclosure route).

The announcement also gives the statistics regarding the claims that have been made over the past year, since the scheme was first announced.

Over 3,000 claims have been made, "koshering" over NIS 10.3 billion. Of the claims made, approximately 60% have been on the anonymous route, and less than 15% using the regular route. The rest have gone for the short version.

More details about the procedures can be found here and here.

If you have income that has not been reported to the Israeli tax authority, contact me to discuss your options and how best to present your case.

28 August 2015

Taxation of trusts - part 7, the Israeli Resident Trust

An Israeli Resident Trust is a trust that doesn't meet any of the other definitions of trust types, described in the previous posts. As such, it includes situations whereby:
  • The settlor was Israeli resident when the trust was settled and remains so, and there is at least one Israeli resident beneficiary in the year in question.
  • There are Israeli resident beneficiaries, but the settlor - who was not Israeli resident - has passed away.
Such a trust is deemed to be Israeli resident for taxation purposes, and the trust income - as a whole - is fully taxable. The taxation options are as discussed in a prior post (here), including the situations whereby the settlor or beneficiaries can be taxed on the income, rather than the trust itself.

For any trusts settled by an oleh prior to their aliyah, the rules are as follows:
  • If the settlor made Aliyah prior to 31 July 2013 (when the laws were enacted), the trust is exempt from taxation for 10 years from the date of Aliyah - provided that there is no income in Israel.
  • If the settlor made Aliyah after the above-mentioned date, the trust will be exempt from taxation until the end of the 10-year exemption period of the settlor or any of the beneficiaries; whichever is earlier. As such, anyone considering Aliyah now who has previously settled a trust should ensure that they are aware of the taxation implications, even within their 10-year period.

As you will have noticed over the last few posts, the area of taxation of trust income is fairly complicated. If this is a situation that you think may affect you (be it for an existing trust, or a trust that is intended to be set up) please contact me to set up a meeting to discuss your particular situation.

28 July 2015

Taxation of trusts, part 6 - Testamentary trusts

A testamentary trust is one whereby the trust comes into existence as a result of the will of an Isrseli resident upon the death of the settlor.

Such a trust is taxed based on the residence of the beneficiaries.

If none of the beneficiaries are Israeli resident, the trust is deemed non-resident and hence exempt from Israeli taxation on income earned outside ISRAEL.

If however, there is one beneficiary who is an Isrseli resident, the entire trust is taxable. A noticeable exception will apply if the Isrseli resident beneficiaries are all within their ten-year exemption period - assuming of course that all income is earned outside Israel.

In a case where there is a single beneficiary, who is an Israeli resident, the beneficiary  can elect to have the income of the trust taxed in their own hands, rather than at the trust level.

22 June 2015

Taxation of trusts - part 5, Israeli-Resident Beneficiary Trust & Non-Israeli Resident Beneficiary Trust

The Israeli Resident Beneficiary Trust

This is any trust whereby the settlor is a non-resident of Israel and has been since settling the trust. Furthermore, at least one beneficiary is an Israeli resident in the current tax year.

If there is a family relationship between the settlor and beneficiaries, the trust is deemed a Relative Trust (see here for more details). If not, the trust is a regular Israeli Resident Beneficiary Trust. The taxation is treated in the same way as for a regular Israeli Resident Trust (see here for more).

Foreign Beneficiary Trust

This is the opposite situation. The settlor is an Israeli resident, but the beneficiaries are not. In such a case, there is no Israeli taxation on assets and income outside Israel.

However, there are very strict rules surrounding the details as to when a trust can qualify as a Foreign Beneficiary Trust:

(1) The trust is deemed irrevocable (see here for more).
(2) All beneficiaries (including those not yet born) can be identified and are non-resident in Israel.
(3) The trust deed forbids any Israeli resident becoming a beneficiary, and any non-resident beneficiary loses their status when they become Israeli resident.

It is this last clause that will normally cause a trust not to be classified as a Foreign Beneficiary Trust.

25 May 2015

Taxation of trusts - part 4, Taxation basics

The default position (except for the Family Trust, as mentioned here) is that the trust itself is liable to pay the taxes on the trust income. It is the trustee who is required to file the tax returns and who is responsible for ensuring that the taxes are actually paid.

The rates of tax applicable are the highest rates applicable to individuals, i.e. 48% plus the 2% surtax for total taxable incomes above NIS 811,560 (2014).

That being said, the tax rate is also limited on certain passive incomes in the same way as for an individual, e.g. 25% on most interest, dividends and capital gains, 10% on Israeli residential property or 15% on foreign rental incomes.

It should be noted that the exemptions and tax credits that apply to individuals do NOT apply to trusts. As such, there is no exemption for low-earning trusts who have interest income (compare here) or Israeli residential income (compare here).

There are though situations whereby the settlor or beneficiary can pay the taxes on the trust income. In such cases, the taxpayer can use their allowances and credits as if the income was earned themselves. They cannot though claim exemptions from tax on a personal level, if the exceptions are limited to certain income levels (e.g. residential property income):

Settlor as taxpayer:

1. The trust is revocable.
2. There is only one settlor, who is an Israeli resident and is still alive. The spouse of the settlor is also considers a settlor in such a case provided they are also Israeli resident.
2. Such an election must be made in the first tax return for the trust/settlor, and the decision cannot be revoked.

Beneficiary as taxpayer:

1. The trust is irrevocable (see here)
2. The income that is to be reported by the beneficiary must have been distributed within six months of the end of the tax year, or when the tax returns are filed; whichever is earlier.
3. Any undistributed income must be accounted for and taxes paid at the trust level.
4. The distribution is assumed to have come from the various income sources on a pro-rats basis, unless the trust deed says otherwise.

4 May 2015

Voluntary Disclosure - update

Last night, the accountant world of Israel got together to review the Voluntary Disclosure procedure after the first eight months of the new system being in place.

The facility was announced back in September, and you can read more about it here.

Let's not forget that the main carrot being dangled by the tax authority is immunity from prosecution. That peace of mind is no small thing - the last thing anyone wants is the tax authority to knock on their door in the middle of the night (or any other time for that matter).

At the same time, the primary goal of the tax authority is to encourage more people to come into the system and start paying their taxes on an ongoing basis.

Whilst not a huge amount was learned, there were a few important points that were clarified:

  • The tax authority are interested in people sorting out tax crimes (of all natures) going back 10 year (i.e. no further back than 2005). For prior periods, the tax authority needs to be satisfied that the source of funds is clean, and the burden of proof is on the taxpayer in question to prove that the funds were not from monies that should have had Israeli tax paid on them. If proof cannot be forthcoming, expect an "imputed tax" to be levied.
  • The "short" route qualifications are treated fairly leniently, i.e. they want more people in this route. This should allow for quicker audits by the tax inspectors - although whether this happens in practice remains to be seen.
  • The "anonymous" route is designed to give the taxpayer piece of mind regarding the tax due before disclosing their name. The representative said that he has not heard of a single case where the amount has been reneged on once the name has been disclosed.
  • The approval stage (checking that the taxpayer has no started investigation) is taking much longer than expected. The authorities are trying to improve this aspect; but it is not entirely in their hands.
  • In and of itself, the receipt of the form sent out by the tax authority requesting information (see more here) does not necessarily imply prior information; much depends on why the person received the form and whether it has anything to do with the unreported income.
  • To date, approximately 1,600 requests have been made.
  • The tax authority representative said that tax paid incorrectly to a foreign country (e.g. due to Double Tax Treaty provisions) that cannot be recovered "will be taken into account". He declined to elaborate further as to how that would be done.
  • Paying the tax - and thereby sorting out the civil side of the issue - puts you in s much better place in terms of potential criminal proceedings. And so, even for those who don't want to go into the full disclosure scheme should report their income and pay the tax due, even if they don't get the "get out of jail" card.

Don't forget, applications for the "short" or "anonymous" routes must be submitted by 6 September 2015.

I cannot sufficiently stress how important it is to sort these matters out now. With information sharing taking huge strides by tax authorities around the world, there simply won't be the possibility of hiding current, future or past undeclared incomes.

27 April 2015

Taxation of trusts - part 3, the Relatives Trust

The biggest change in the 2014 amendments to the trust taxation law relate to these types of trust.

This is a trust whereby all of the settlors are not - and have never been since inception of the trust - Israeli resident, but at least one of the beneficiaries is Israeli resident. Further, there is a family relation between settlors and beneficiaries.

The cases are clear where the relationship is that of spouse or (grand)parent. Where the relationship is of other first degree relations, the tax authority must be satisfied that the trust has been set up in good faith and that the beneficiaries did not contribute anything towards the trust assets.

For Israeli assets and income, tax is levied as for any Israeli individual. For overseas assets and income:

The default taxation position is that the beneficiary pays a flat 30% tax on any distribution that they receive. Of this, any principal is not taxable, but the onus to prove this may be on the trustee. Further, it is assumed that profits are distributed before capital.

However, an election can be made to tax the trust income - on an ongoing basis - at a flat 25%. For these purposes, the taxable income is based on the percentage of beneficiaries who are Israeli resident. This election has to be made early on in the life of the trust, and cannot be changed. In this case, the distributions will be tax-free.

It should be noted that where a beneficiary is a new immigrant or (veteran) returning resident, the exemptions available to them also apply to their portion of the incomes during the relevant exemption period.

It is important to know that such a trust ceases to be classified as a Relative Trust when the settlors pass away.

And of course, there are a number of forms and deadlines to meet.

For more information, best to speak to an expert. 

27 March 2015

Are you required to file a 2014 tax return?

This post is a similar post from last year, with the required amendments etc. pertinent to the 2014 tax year. The current deadline for filing your 2014 tax return is 31st May 2015 (but this is likely to be extended by a month).

The Tax Law states that every Israeli resident is required to file a tax return every year, and doing so late results in hefty penalties (in excess of NIS 1,000 for each month between the official deadline and the actual filing).

That being said, a supplementary ruling to the law grants exemptions from filing if you (and your spouse - assume this the whole way through this post) meet certain criteria.

The exemptions are in place in order to relieve the burden on the already-overstrechted tax authorities having to process tax returns for people who won't have any supplementary tax to pay anyway.

There are though certain people whose circumstances dictate that they must file, regardless of their earnings. If you fall into at least one of the following categories, you must file a return:

(1) You are a controlling shareholder (10%+ ownership including holdings of close family) of a company or similar corporation. This applies to all Israeli corporations, and many overseas corporations.
(2) Earned income of husband and wife is assessed together, rather than seperate calculations. See here for more.
(3) You received severance pay that was spread over a number of years - one of those years being 2014 (known as פריסת פיצויים).

(4) You were required to file a tax return for 2013, but not for one of these reasons.
(5) You own shares in a non-publically traded non-Israeli corporation.
(6) The value of your overseas assets at any point in 2014 exceeded NIS 1,874,000. This requirement is not relevant for those who fall into the "10-year exemption" for new olim.

So, assuming you do not meet any of the criteria above, you are exempt from filing a 2014 tax return if your income in 2014 was exclusively from the following list. If you had income from any other source, you are required to file:

(1) Salary (including pension and פיצויים) - if the gross amounts received were less than NIS 660,000 (per spouse) and tax was deducted at source.
(2) Rental income (above the exemption limit), provided that (a) the total gross rents were less than NIS 337,000 and (b) the 10% tax was paid by 30th January 2015.
(3) Foreign interest, dividends, capital gains etc, provided that (a) the total gross income was less than NIS 337,000 and (b) the tax (the rates depend on the exact nature of the income) was paid using the "short form" at the post office or online by 30th April 2015.
(4) Foreign pension, provided that (a) the total gross income was less than NIS 337,000 and (b) no tax is due in Israel under the provisions of section 9c of the tax law (see here for more) - beyond the scope of this post - perhaps I'll address it some other time).
(5) Israeli-sourced interest and/or linkage income, provided that either (a) it is exempt from Israeli tax or (b) tax was deduced at source and the gross income was less than NIS 644,000.
(6) Capital gains made on the sale of publically listed shares provided that either (a) it is exempt from Israeli tax or (b) tax was deduced at source and the gross sales were less than NIS 1,874,000.
(7) Other types of income which are subject to tax and tax has been deducted at the maximum rate.
(8) Other income exempt from Israeli taxes.

(9) Your total taxable income from all sources was less than NIS 811,560.

If the total gross income of (7) and (8) combined is at least NIS 337,000, no exemption is granted.

Whilst this looks a little daunting, in many situations the requirement or exemption from filing is reasonably clear - but if in doubt, take professional advice.

18 March 2015

Working Grant 2014 מענק עבודה

This was previously known as Negative Income Tax - מס הכנסה שלילי.

A number of years ago, the government introduced a scheme designed to help workers earning very little. This grant, based on average monthly earnings in the previous tax year, was initially available only to those living in certain parts of the country.

Who is eligible?

You must meet the following criteria:
1. Be aged 55+ or aged between 23 and 54 and have at least one child.

2. You, together with your spouse, own no more than a 50% stake in any land or property (worldwide) that is not your residence.

3. Your average monthly earnings in 2014 (salary or freelancer, based on actual months worked) was between approx. NIS 2,070 and NIS 6,766.

It should be stressed that you are not eligible for months on which you received salary from a family member, or a company controlled by a family member.

Furthermore, maternity pay received from Bituach Leumi is treated as earnings for these purposes.

4. If you were required to file a tax return for 2014, you did so on time (including those who received extensions)

5. The claim must be made by 30th September 2015, so you need to move fast! That being said, the deadlines on the last few years were extended to December.

6. Any employer filed their employer-summary form on time (form 126). If they did not, you will be asked to provide the authorities with form 106 in order for them to fully process your claim.

How much is the grant?

The grant, per month of eligibility, is based on your average monthly earnings and can reach as high as NIS 720. The full table is as follows:

Monthly grant (NIS)
Average monthly income (NIS)
- woman (1 or 2 children)
- single father responsible for 1 or 2 children
- married father (1 or 2 children)
- aged 55+ without children
- woman (3+ children)
- single father responsible for 3+ children
- married father (3+ children)
The amounts here are based on the 1st June 2014 figures, and will be amended with inflation on 1st June 2015.

In certain circumstances, the amount due to you will be reduced. This is the case if you are in receipt of one (or more) of the following:

1. Pension income, excluding disability or survivor pensions.
2. Bituach Leumi grant for work or other accident.

Similarly, your spouse's income could reduce your grant.

A simulator (Hebrew only) has been provided by the tax authorities here. It's worth having a look at if you think your claim is borderline.

How to make the claim

The claim is made at a post office branch (and only there), and must be made in person. Be careful though: not all post offices are officially branches - check the postal service website before setting off.

You need to take with you your ID card (Teudat Zehut) and a cheque (of formal notification of account details from the bank).

The clerk will hand you a form on which you state:
  • Number of employers in 2014 for both you and your spouse.
  • Whether you we're self employed in 2014
  • Postal address
  • Bank details
You will get to keep a portion of the form, which will have details regarding how to monitor your claim. You can monitor your claim online here (Hebrew only).

How you get paid

If you are an employee, you will receive your grant in two, three or four equal payments directly into your bank account, depending on whether you get the form in by the end of March 2015, June 2015 or later.

If you are self-employed (with employment income below NIS 2,070 per month), the grant is offset against your 2014 tax liability. If you have excess grant, it will be offset against the next three year's tax liabilities (i.e. 2015, 2016 & 2017). If, after that, there is still some grant left over, 75% of the remainder will be paid directly into your bank account on 15th July 2019.

27 February 2015

Taxation of trusts - part 2, Revocability

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The trust laws relate to the revocability of the trust. This can affect which type of tax rules apply to a particular trust (see here for the introduction to trust taxation).

This post will consider what makes a trust revocable or irrevocable from the point of view of the Israeli tax law. In subsequent posts we will see how and when this becomes relevant.

A trust is considered irrevocable if it is not a revocable trust. The following is a list of situations whereby a trust is considered revocable. Only one of these situations need to apply for the trust to be considered revocable:

1. It is possible to cancel the trust or otherwise revert the ownership of the trust assets or incomes to the settlor, their spouse or a corporation controlled by the settlor.

2. The settlor or their spouse are, or can become, one of the beneficiaries.

3. A child, aged 18 or under, of the settlor is a beneficiary - provided that the settlor or their spouse is still alive.

4. A company controlled by either the settlor, their spouse or their child aged 18 or under, is a beneficiary.

5. The trustee is a settlor.

6. The trustee is a close relative of the settlor. This is unless it can be shown that the settlor had no undue influence on the decision making of the trustee.

7. The identity of a beneficiary is unknown. This is unless it can be shown that the unidentified beneficiary is NOT the settlor, their spouse, their child aged 18 or under or a company controlled by one of the above.

8. Beneficiaries were added or exchanged against the terms of the trust deed.

9. The relevant reports were not made for an irrevocable trust.

This last point can make it crucial to ensure that planning is done with relevant professionals before the trust goes into effect.

9 February 2015

Taxation of trusts - part 1, Introduction and Definitions

In August 2013, the taxation of income within trusts underwent a huge reform, with a vast array of changes to the pre-existing law. The law came into effect as of 1st January 2014, but there are still a number of unresolved issues; particularly pertaining to foreign tax credits.

The following posts will look at the types of trust set out in the tax law, and the various options for how the trust income is to be taxed in Israel. This post will deal with some background and defintions.

So, what is a trust?

Without going into the fine legal detail, a trust exists when someone holds onto assets for the benefit of someone else. A classic example would be when a lawyer holds monies on behalf of a client to be used at a later date (e.g. a conveyancing deal). The person holding the asset, "trustee" does so at the request of the "settlor" (or "grantor"), with the assets or income generated theron being for the ultimate benefit of the "beneficiary".

The trust is governed by the "trust deed" in which the settlor directs the trustee how to run the trust; e.g. how to invest the funds, under what circumstances monies can/should be released to the beneficiaries, etc. There is no set format for such documents, although most countries around the globe have laws governing some of the basic rules and responsibilities. Many countries which are considered to be tax shelters have fairly advanced rules and regulations; those in Israel are fairly simple. What this adds up to is that many trust deeds will be governed according to the laws of a country foreign to all components of the trust!

Trusts are a particularly popular and effective way of managing wealth on an inter-generational level, as well as having useful tax and legal consequences.

The tax law sets out definitions as follows:

Settlor - a person who transfers assets to the custody of the trustee. The transfer must be made for no consideration (otherwise it is considered a sale). A controlling shareholder is also considered a settlor if the company that they control transferred the assets to the trustee. There are of course a few other nuances as well for more complicated scenarios.

Trustee - the person to whom the assets have been given over to look after. The trustee is the legal owner of the assets, but they are not his/hers; they are held "on trust" for the benefit of the beneficiaries. For this reason, a trustee may decide to open up a Company for holding Trust Assets, whose sole purpose is to keep the ownership of the assets that were transferred to the trust out of the name of the trustee. This is particularly popular where a trustee might be responsible for a number of trusts, and having seperate companies makes the management of the different trusts significantly easier. It should be noted that there are reporting requirements to inform the tax authority that the company has been set up purely for these purposes.

Beneficiary - the person who will be entitled to benefit from the assets or income in the trust. This could include someone who is not yet born (e.g. a trust is set up by someone for the benefit for all of their grandchildren), as well as someone who will become a beneficiary if certain conditions are met. However, a person is not considered a beneficiary if they will become one only after the passing of a settlor or beneficiary - provided of course that the particular settlor or beneficiary is still alive.

27 January 2015

Overseas Companies, part 5 - Form 150

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As part of the disclosures required in the tax return, anyone who is considered a controlling shareholder in a non-Israeli company must complete form 150, and attach it to the tax return.

A controlling shareholder is someone who, directly or indirectly, owns at least 10% of the rights of the company (e.g. shares, voting rights etc.). Furthermore, in determining the percentage of ownership, the percentages owned by first-degree relatives are also taken into account.

The purpose of the form is to inform the tax authority of the existence of the company, as well as the approach that has been taken in terms of tax treatment in Israel. The information is of course designed to allow the tax authorities to make their own assessment, and potentially disagree with the approach.

The form has room for details of 2 companies. Of course, if there are more companies, extra forms should be completed.

The first part of the form contains some basic details of the company - name (Hebrew and original language), registration number and the country in which the company was incorporated.

The next question relates to the country of residence of the country, which could be different to the country in which the company was incorporated. This relates back to the issue of "control and management" of the company - see here for more.

The next question relates to the office (registered) address of the company, and then the form asks for the date that the shareholder acquired their share(s) in the company.

The following questions asks whether the income of the company is treated - for tax purposes in the country of residence of the company - as see-through to the shareholders (e.g. the LLC in USA - see here for more), or "regular," i.e. belonging to the company itself. If the former, an election can be made in Israel to treat the income in a similar fashion.

The next question relates to the correspondence address of the company, followed by email address and telephone & fax numbers. The final question in this section relates to an identity number given by the Israeli authorities to this company.

The bottom set of questions relate primarily to the activities of the company.

The first question asks for a short description of the business activity of the company.

The next two questions ask whether the majority of the income of the company is derived from passive income (e.g. interest, dividends, rental etc.), and - if so - whether the company meets the definition of a Controlled Foreign Company.

The following two questions deal with whether the majority of the income of the company is derived from a "Special Profession", and - if so - whether the company meets the definition of a Foreign Professional Company.

The next question asks whether the shares of the company are publically traded, and the final question asks whether there are any persons who manage the company or a directors of the company who are Israeli residents. This of course gives rise to the question of the company being "controlled and managed" from Israel, with all of the potential repercussions.

The bottom section of the form requests information regarding the percentage holding of the tax payer - both ordinary shares and other rights, according to various rights that the shares/rights will give them (profits, votes etc.). The percentages requested are the year-end percentages, and the highest during the tax year.

This is an extremely important form to get right, and if in doubt - I strongly recommend asking a professional for assistance.

6 January 2015

Form 101 - 2015 version

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As previously discussed, all employees are required to fill in form 101 for each place of employment, and give it to the person in charge of the salaries. Technically, this needs to be filled in on the 1st of January (for continuing jobs), but for practical reasons it’s sufficient to have it filled out before the January salary is processed.

If your employer doesn’t give you one, you can download a blank form from the tax office here.

Below is a short guide to filling in the form for the 2015 tax year.

Section א

Employer’s details – to be filled in by them

Section ב

Employee’s basic details – should be reasonably self-explanatory

Section ג

Children under 18 – relates to any child born in 1997 or later. There’s space for 13 children, which should be enough!

Column 1 is to be ticked if child is under your supervision (i.e. they live with you).

Column 2 is to be ticked if you get child support from Bituach Leumi for this child. I assume this should be ticked by mothers or single fathers only.

Column 3 – child’s name

Column 4 – child’s ID number

Column 5 – child's date of birth

Columns 3, 4, 5 should all be supported by the appendix to your ID card.

Section ד

Details of income from this employer

In the first box, tick the appropriate detail. Most likely you will be getting משכורת חודש (monthly salary) or קיצבה (pension). Refer to the notes at the bottom of page 2 if you are unsure.

Under תאריך תחילה put the later of 01/01/2015 and your first day of employment with this employer.

Section ה

Details of other income

This is probably the most important section of the form. It is imperative not to make a mistake here, especially if you have more than one employer.

If you have only one employment, tick the very top box (in its own section), and move on.

Otherwise, tick the second box down, and then tick the type of other income that you have (as per section ד). You will then need to tick as follows:

First box – if you wish this employer to be your “main” employer (i.e. they treat your salary as if it’s the only one that you get – generally the payer who is likely to pay you the most during the year), tick this, and move on.

Second box – if this employer is not your “main” employer, tick this. If you do not present your employer with a Teum Mas (see here for further discussion), you will have tax deducted at 48% - you have been warned.

Third box – if you have a Keren Hishtalmut with your “main” or another employer, only tick this if you are being fully taxed on the employer contributions (if in doubt, do not tick). See here for further discussion on this subject.

Fourth box – if you have a pension fund and/or disability insurance with your “main” or another employer, only tick this if you are being fully taxed on the employer contributions (if in doubt, do not tick). See here for further discussion on this subject.

If you have more than one employer, I strongly suggest seeking help in filling this section out.

Section ו

Spouse’s details – Reasonably self-explanatory. Of course, only relevant if you’re married.

Section ז

Changes during tax year – Most likely the birth of a child.

Section ח

Tax credits – Second most important part of the form.

(1)   Assuming you are resident in Israel, tick the box

(2)   Tick if you are disabled or blind, and have confirmation from the tax office to this effect.

(3)   Tick if you and your family live in a “development area” or “special yishuv.” This is not relevant for most people.

(4)   Tick if you are an Oleh Chadash / Katin Chozer (made Aliyah in August 2011 or later), or a returning resident (who was non-Israeli resident for at least six years) who came back to Israel between 16 May 2010 and 30 September 2012.

(5)   Tick if spouse has no income and you are either disabled/blind (as per (2) above) or have reached Israeli retirement age.

(6)   To be ticked by a single parent, provided that they are supervising at least one child and are receiving child benefit from Bituach Leumi for that child.

(7)   To be ticked by mothers of children (who live with her) born in 1997 or later, or fathers who meet the criteria in (6) above. Then fill in the number of children who meet the following criteria:

a.       Children born in 1997 or 2015

b.      Children born between the years of 2010-2014

c.       Children born between the years 1996-2009

(8)   To be ticked by fathers and mothers who do not meet the criteria in (7) above. Then fill in the number of children who meet the following criteria:

a.       Children born in 2012 or 2015

b.      Children born in 2013 or 2014

(9)   To be ticked if you are supervising a child who only has one parent.

(10) Tick if you are an unmarried parent of a child whom you are not supervising, but are providing monetary support. A court judgment to that effect should be handed to the tax office.

(11) Tick if you are remarried and are paying alimony to the former spouse. Again, a court judgment to that effect should be handed to the tax office.

(12) Tick if you are aged 16 or 17 as of 01/01/2015.

(13) Tick if you have recently finished army or national service. Dates of start and finish should be provided, as well as documentary evidence to that effect.

(14) Tick if you have finished an academic degree and/or professional qualification in prior years. Form 119 needs to be completed as well to ascertain how many credits you are eligible for.

Section ט

Teum Mas – Normally this is not filled in, as you would go straight to the tax office to get a Teum Mas.

Section י

Declaration – date and sign the form.