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).

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 circumstancesthe 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.

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.