Israel A Freindly Tax Collector? Breakfast seminar, Beau Rivage Hotel, Geneva, 29.10. 2013 Presentations by: George Rosenberg, Ran Artzi, Hagi Elmakisse, Inbal Faibish Wassmer
Taxation of Trusts in Israel George Rosenberg, Adv. Senior Partner Rosenberg Abramovich Keren-Polak Epelman, Advocates Tel Aviv & Zurich Israel A Friendly Tax Collector? Breakfast seminar, Beau Rivage Hotel, Geneva, 29.10. 2013
The History to Date I. Pre 2006 Revocable / irrevocable trusts Foreign control II. 2006 2013 Taxation at trust level trustee liability Resident / non-resident trusts 4 categories of trusts: 1. Israeli Resident Trust 2. Foreign Resident Settlor Trust 3. Foreign Resident Beneficiary Trust 4. Trust by Will III. 2014 Onwards (see next slides) 3
Tax Reform in Taxation of Trusts 2013 1 Trust type Parameters Pre-2014 January 1, 2014 Onwards Deemed Income* Israeli Resident Trust Foreign Resident Beneficiary Trust resident, or deceased non-resident settlor; resident beneficiary; resident settlor; nonresident beneficiaries exclusively; irrevocable trust Taxation Reporting Taxation Reporting Worldwide accrued income; cash distributions not taxable Taxable on creation if assets would be taxable on direct transfer from settlor to beneficiary; taxable on accrued Israeli income only; cash distributions not taxable. Full No change No change Settlor Annual notice No change No change Non-resident Individual * In all trusts it is the trustee who is the person assessed and who is primarily liable for payment of the tax, but the income is deemed to be either that of the settlor or beneficiary, as indicated. Where there is an Israeli resident settlor/beneficiary, election may be made for the settlor/beneficiary to be the assessed person who is liable to tax. 4
Tax Reform in Taxation of Trusts 2013 2 Trust type Parameters Pre-2014 January 1, 2014 Onwards Deemed Income* Taxation Reporting Taxation Reporting Foreign Settlors Trust (replaces Foreign Resident Settlor Trust) non-resident settlors (alive or deceased); only non-resident beneficiaries, past or present (alive or deceased) and/or resident public institutions beneficiaries Taxable only on accrued Israeli income; only distribution of Israeli assets taxable if taxable on direct transfer from settlor to beneficiary. None if no Israeli source income or assets Existence of resident beneficiary, past or present, eliminates Foreign Settlor Trust (see Israeli Resident Beneficiary Trust); No change Israeli Resident Beneficiary 5
Tax Reform in Taxation of Trusts 2013 3 Trust type Parameters Pre-2014 January 1, 2014 Onwards Deemed Income* Taxation Reporting Taxation Reporting Israeli Resident Beneficiary Trust Relatives Trust Non-resident settlor past and present; Israeli beneficiary Israeli Resident Beneficiary Trust where settlor is still living, and settlor beneficiaries are related in certain degrees. N/A N/A Taxable as an Israeli Resident Trust N/A N/A Taxable on income distributions at 30%, or on accrued income at 25% at trustee s option Full Notices regrading and tax option - 60 days from creation/conversion; if created prior to 01.08.13 existence notice: 180 from said date i.e., 28.01.14); option notice: with first tax return Israeli resident individual Israeli resident beneficiary 6
Tax Reform in Taxation of Trusts 2013 4 Trust type Parameters Pre-2014 January 1, 2014 Onwards Deemed Income* Trust by Will Deceased testator was Israeli resident Taxation Reporting Taxation Reporting If at least one resident beneficiary taxed as an Israeli Resident Trust; if all beneficiaries are non-residents taxed as a Foreign Resident Beneficiary Trust According to taxation No Change No Change In case of IRT Israeli resident individual; In case of FRBT non-resident individual 7
Thank you! George@rosak-law.com www.rosak-law.com +972 3 608 14 51 +41 43 501 0500 8
Biography George Rosenberg George was born in Vienna, Austria. He is an advocate, admitted to the Israel Bar in 1969. He is also a member of the Quebec, Canada Bar, to which he was admitted in 1962. He was educated at McGill University, in Montreal, (BA, 1957; BCL, 1960) and the University of Paris (Faculté de Droit, 1960/61). He practiced in Montreal until 1968 when he immigrated to Israel where he has been in private practice as of 1969. He also practices as a foreign lawyer in Zurich, Switzerland where the firm has had a branch office since 1998. He has developed a wide range of experience in commercial law with particular emphasis on international tax planning, trusts, corporate law and international transactions. He has also published widely, e.g., "Legal Aspects of Doing Business in the Middle East - Israel", International Business Series, Kluwer Law and Taxation Publishers, "International Joint Ventures in Israel", International Joint Ventures, Matthew Bender & Company, Inc., and various taxation journals. He is a member of the International Bar Association (past National Reporter for Israel on the Tax Committee); American Bar Association; Union International des Avocats; International Tax Planning Association; and Society of Trust and Estate Practitioners. 9
Returning Resident and New Resident, Residency interpretation for Tax Purposes, Trust Settlements Ran Artzi, CPA Managing Partner Artzi, Hiba & Elmekiesse - Tax Solutions Ltd. Israel A Friendly Tax Collector? Breakfast seminar, Beau Rivage Hotel, Geneva, 29.10. 2013
Returning Resident Definitions: The Israeli Tax Ordinance ( ITA ) distinguishes between two types of returning residents: (Regular) Returning Resident ( RR ) - a person who returns to Israel after being a foreign resident for at least a period of 6 years. Veteran Returning Resident ( LTRR ) - a person who returns to Israel after being a foreign resident for at least a period of 10 years. New resident (New Immigrant) ( NR ) entitles to benefits as LTRR, as described in the following slides. 11
Returning Resident exemptions and relieves granted to LTRR and NR and New: According to Sections 14(a) and 97(b) of the ITO, income of a LTRR is exempt during the first 10 years of his residence in Israel, irrespective of whether the income is passive or active, or capital gains accrued or derived from outside of Israel, unless he requests otherwise. LTRR and NR are exempt from reporting and disclosing their income from outside of Israel on their tax returns, meaning they are not obligated to report and disclose their assets outside of Israel. The Exemption is also applicable on newly purchased assets or new activities outside of Israel, after the date the LTRR and NR transferred their center of life to Israel, under certain conditions. 12
Returning Resident Exemptions and relieves granted to Returning Resident: According to Sections 14(c) and 97(b)(2) of the ITO, income of a Returning Resident is exempt as follows: An RR is exempt from tax for 5 years from the date of return on passive income (interest, dividends, royalties, rentals and pensions) generated outside of Israel or whose source is from assets outside of Israel and for 10 years on capital gains from the sale of such assets, all this being in relation to assets acquired by him while being a foreign reside. Income from interest and dividends derived from assets located outside of Israel, which are classified as Eligible Securities. The aforesaid exemption on income for RR is awarded under condition that the income is passive and does not derived form a business. 13
Returning Resident Destinctions between RR and LTRR: Subject / Type of income Exemption on passive income from assets located outside of Israel Exemption on capital gains from assets located outside of Israel Exemption on business income derived outside of Israel Exemption on wage or self-employed income derived outside of Israel (Regular) Returning Resident Period of 5 years Period of 10 years No No Long-Term Returning Resident and New Resident Period of 10 years Period of 10 years Period of 10 years Period of 10 years 14
Returning Resident Subject Applicable on newly purchased assets or new activities located outside of Israel (Regular) Returning Resident No Long-Term Returning Resident and New Resident Yes Relief with respect to Management and Control test No Yes exemption from reporting and disclosing income from outside of Israel on tax report, meaning no obligation to report and disclose assets outside of Israel No Yes Relief with respect to CFC and Foreign Self-Employed Company No Yes Conditional trial period No Yes 15
New Court Decisions Regarding Residency In the matter of Sapir vs. Assessing Officer - regarding splitting the family unit: Sapir work and lived with his family in Singapore during the period of 1994-1998 and afterwards came back to Israel. Sapir returned solely to Singapore, without his close family, from the year of 2001. The question in matter was whether moving to live in Singapore without his close family, will discontinue the Israeli residency? The court decided, that most of Sapir s linkages indicate that the center of life has been transferred to Singapore, even thought Sapir s wife stayed and continued to live in Israel. 16
New Court Decisions Regarding Residency In the matter of Mr. K.A vs. Assessing Officer the residency was continued: K.A claimed that he was a Romanian resident. He started his operations in Romania from the year of 1998 and lived there with a Romanian spouse, who was a Romanian resident. Even though K.A spent each year less than 183 days in Israel, the presumption of being an Israeli resident by staying in Israel 30 days in the current tax year and in additional accumulated 425 days the next 2 years ( The Presumption ) applied to him. The court decided that the residency burden of proof was on K.A because the abovementioned presumption is validated on him. Regarding K.A residency, the court decided that the home in Israel was his Permanent Home. When taking into consideration that K.A claimed for tax purpose the credit point for being an Israeli resident and that his claims regarding (i) Romanian spouse and (ii) his expenses in Romania were not proven, and most of his personal parameters were tended to Israel. 17
Implications of the Court Decisions (1) From the combination of the Court decision, while recognizing the split of the family unit for residency, we believe that that when a spouse of a foreign resident can become an Israeli resident and will be entitled to the benefits granted to LTRR, RR or NR as applicable, while the other spouse remains a foreign residence, the foreign spouse will be granted the benefits given to LTRR, RT or NR, as applicable, upon moving her/his center of life to Israel. Hence, the spouse who does not transfer her/his center of life to Israel, will not be considered to be an Israeli resident as long as he/she can prove a linkage to her/his country of current residency. 18
Implications of the Court Decisions (2) For example: a family composed of a husband, wife and daughter which transferred before their center of life to a foreign country, could split their family unit by means of returning only the center of life to Israel of the wife and the daughter, and enjoy the benefits granted to RR, while the husband remains a foreign resident; After a few years, when the husband will transfer his center of life to Israel he will enjoy the benefits granted to LTRR. Furthermore, a trust whose settlor will not transfer his center of life to Israel and keep his linkage to a foreign country, while the settlor s spouse, who is not a beneficiary of the trust and will transfer the center of life to Israel, shall maintain its foreign residency, subject to the examination of the trust s beneficiaries residencies. 19
Trust Settlements - trust converted from FST to IBT Amendment no. 197 to the Ordinance, added a new definition of trust - Israeli Beneficiary Trust ( IBT ). A Sub classification of an IBT is a Relative Trust ( RT ) - a trust of which the settlor and the beneficiary has family connection as follows: The settlor is the father, grandfather, spouse, child or grandchild of the beneficiary. The settlor and the beneficiary fulfill one of the following relative connection as defined in relative in section 88 to the ITA: spouse, brother, sister, parent, parent's parent, offspring and spouse's offspring, and the spouse of any of these ( First Degree Family Relation ). offspring of a brother or sister, and brother or sister of a parent ( Second Degree Family Relation ). 20
Taxation of FST converted to RT In light of our past experience in settlements made in the past, when previous amendments of the ITO came into force, and following our recommendation to a committee of the ITA regarding the taxation on Trusts, we can assume that the RT capital until December 31 st 2013, ( RT Capital ) will be taxed, as follows: A range of percentage of the RT Capital in cases where the trust shall be classified as an RT, in case the trust settlor is alive, when amendment no. 197 came into force and the settlor and the beneficiary has one of the either connection, : First Degree Family Relation, or The settlor and the beneficiary fulfill a Family Relation or second degree, and the assessing officer was convinced that the setting of the trust was in good faith and the beneficiary did not transfer any consideration to the settlor for his attributed rights to the trust s assets. 21
Taxation of FST converted to IBT with family relations In case of an FST that will be converted to IBT, provided that the settlor passed away before August 1, 2013 The trust has family relations of first or second degree It may be then possible that either a certain range of taxation will be levied on the trust capital, or alternatively, a certain tax range will be levied on the trust income in a given period, The above may apply also to a trusts converted from FST to IBT, in which the settlor and beneficiaries do not have first/second degree relations, if the assessing officer is convinced that the trust has not been settled for the purpose of tax-avoidance and the settling the assets into the trust were made in good faith. 22
Thank you! Ran Artzi, CPA. Managing Partner artzi@ahe-tax.co.il Artzi, Hiba & Elmekiesse - Tax Solutions Ltd. 23
Biography Ran Artzi Ran is the managing partner of Artzi-Hiba Elmekiesse Tax Solutions Ltd. He is an Israeli Certified Public Accountants (C.P.A) since 1993. Ran has a Bachelor s degree (B.A) in Accounting and Business Administration from the Tel Aviv College of Management. Ran founded and launched the tax division in one of Israel s four largest accounting firms. Ran served there as a partner, managing the tax division. In the framework of his position, he managed a staff of about twenty five accountants, lawyers and tax consultants, and was in daily contact with the Israeli tax Authorities. His expertise was instrumental in establishing the tax division in the firm as one of the leading tax firms in Israel. During the years of his activities in the Israeli fiscal sector, Ran participated in many significant and substantial transactions in the Israeli economy. Ran is an active member of the Tax Journal of the Institute of Certified Public Accountants in Israel Misim U Maasim ["Taxes and Deeds"]. He is responsible for and a participant in the writing of dozens of professional articles and responses to questions regarding taxation in Israel and abroad, published in professional literature and the press in Israel. Ran serves as a member of the Taxation Committee of the Institute of Certified Public Accountants in Israel (since 1995) and the chairman of the Taxation Committee of Lahav (Chamber of Independents and business organizations in Israel). In this capacity, he participated and continues to be actively involved in the tax legislative process in Israel, including by representing these organizations in the Knesset Finance Committee, as well as in negotiations with the tax authorities with regard to proposed legislation. 24
Voluntary Disclosure and Trust Settlements before the Israeli Tax Authority Hagi Elmekiesse, CPA (Adv.) Partner, Artzi, Hiba & Elmekiese - Tax Solutions Ltd. Israel A Friendly Tax Collector? Breakfast seminar, Beau Rivage Hotel, Geneva, 29.10. 2013
Purpose of Voluntary Disclosure 1. Receiving immunity from the Israel Tax Authority ( ITA ) regarding criminal sanctions (interrogations, arrests, indictment/criminal fines). 2. Disclosure of income, assets and funds that were not reported to the ITA in the past. 26
Conditions for Voluntary Disclosure 1. A truthful application, not resulting from an investigation or examination conducted by the ITA. 2. No prior information is in possession of the ITA or any other governmental authority with regards to the voluntary Disclosure. 3. No examination was made by the ITA at the civil level. 4. Published media information as well as information included in documents submitted to Israeli courts are considered as information in the possession of the ITA. 5. Removal of the civil infringement (tax payment). 27
Preparation of a Voluntary Disclosure Application Two steps when dealing with voluntary disclosure potential application Step 1: Gathering data & documents and analyzing the tax exposure. Step 2: Applying to the ITA to settle the criminal and civil infringement. 28
Step 1: Data Gathering, Analysis of Tax Exposure During this stage there is no contact with the ITA. Gathering of all the facts to be used as background when preparing the application. Explanations regarding origin of funds (gift, inheritance, trust distribution, etc.) Preparation of supporting documents regarding origin of funds and the funds yields. Collection of bank data for each year-ends Collection of bank data regarding yields (interest, dividend, realized capital gains). 29
Step 1: Data Gathering, Analysis of Tax Exposure Analysis of the tax exposure: Calculating the tax exposures in Israel regarding accrued income. Evaluating the tax exposure with regards either to the deposit(s) of the initial funds or with regards to the balance at a specific date. 30
Step 2: Approaching the ITA (1) Phase A: Settling the criminal infringement : Written application to the ITA including the case s background, facts and details regarding the income amounts not reported. The ITA examines possession of prior information related to the Voluntary Disclosure, in the ITA, other governmental authorities, published media and judiciary documents. Answering questions / clarifications to the ITA Investigation Unit and transferring documents as requested. Receiving approval that no criminal prosecution will be conducted - Insurance policy. 31
Step 2: Approaching the ITA (2) Settling the civil infringement: Applying to the civil tax assessing office. The application is made in parallel or after the application to a voluntary disclosure is made. In some cases - possibility to apply anonymously to the assessing officer before the application to a voluntary disclosure. Negotiating with the ITA regarding tax liability concerning the fund s original deposits or the fund s balance at a specific date. In case of lack of information - risk of higher effective tax rates on the funds. At the end of the civil procedure- an agreement with the ITA is signed, settling the funds and detailing the total tax to be paid. 32
Trust Settlements General Application is made on an anonymous basis. Only a civil process - do not need to submit a request to the investigating unit of the ITA. Expertise in the ITA - only two assessing offices are in charge of trusts. Settlement procedure same as voluntary disclosure: Step 1: Gathering data & documents. Step 2: Submitting a request to the ITA. 33
Trust Settlements for Foreign Settlor Trusts ( FST ) Changes as of 1.1.2014. following amendment no. 197 to the Israeli Tax Ordinance. Our firm participated in the ITA committee for determining Settlements for Trusts. Expected possible new application procedure for trusts whose settlors are foreign residents. In principle, taxation on trust capital as of 31.12.2013, and on distributions made in the past years. 34
Tax rates in Trust Settlements Based on our past experience, we believe the ITA shall levy high tax rates, when more problems with the trust occur, e.g. Relatives Trust with characteristics of influence by the beneficiary Relatives Trust with characteristics of influence by the beneficiary and by the deceased settlor Trust without any family relations Influence of beneficiary may include: Authority to determine the beneficiary. The beneficiary can influent the trustee. Managing the trust s assets. Granting services to the trust. 35
Experience with the ITA Over the past five years, we completed approx. 200 voluntary disclosure applications, and 30 trust applications About 90% of the cases were settled with tax levied (on the assets) between 5% to 18%. Under certain conditions, anonymous appointment is possible 36
Thank you! Hagi Elmekiesse hagi@ahe-tax.co.il Artzi, Hiba & Elmekiesse - Tax Solutions Ltd. (visit us at www.ahe-tax.co.il) 37
Biography Hagi Elmekiesse Hagi is partner of Artzi-Hiba Elmekiesse Tax Solutions Ltd. and the head of the firm International Taxation Department. He is a Certified Public Accountants (C.P.A) in Israel since 1999, and is an Advocate and member of the Israeli Bar Association since 2008. He has a Bachelor s degree (B.A) in Accounting and Business Administration from the College of Management, Rishon LeZion and a Bachelor s degree (B.A) in Law from Shaarei Mishpat College. After having served at the Ramle Assessment Office, Hagi joined the pre-ruling department headed by the former Deputy Commissioner of Income Tax Ms. Frida Israeli. In that capacity, he handled requests for pre-rulings from some of the largest companies in Israel. In 2000, Hagi was appointed by the Income Tax Commissioner as a member of the committee for the establishment of an international taxation unit at the Israeli Tax Authority, and later served as one of the founders of that unit. In that capacity, he handled all aspects of international taxation, including the issuing of pre-rulings, the handling of assessment files in international cases and the integration of international taxation issues in the various assessment offices. In addition, Hagi participated, inter alia, in the legislation of the largest international Tax reform, in the writing of circulars regarding international taxation, in the granting of pre-rulings and the handling of complex cases; Hagi also served as a liaison/consultant for the various assessment offices in the country. During 2004, Hagi left the public service and joined the firm. Hagi is responsible for the firm s International Taxation department. In this capacity, Hagi is involved in handling transactions from beginning to end; he handles assessment negotiations with the Tax Authority and the receipt of pre rulings for a variety of issues. 38
The Inconvenient Truth Inbal Faibish Wassmer, Adv. Head of Zurich Branch Rosenberg Abramovich Keren-Polak Epelman, Advocates Tel Aviv & Zurich Israel A Friendly Tax Collector? Breakfast seminar, Beau Rivage Hotel, Geneva, 29.10. 2013
Layout 1. Why now? 2. Topics New and Returning Immigrants still a planning option? The trust world 3G Voluntary Disclosure Procedure, all routes possible 3. Possible solutions 4. Examples 5. Is Israel still a friendly tax environment? 40
Why Now? Globally Looking around Lists and leaks Enhanced international cooperation, bilateral and multilateral agreements OECD Switzerland White Money Strategy Internal policies Israel No expeditions / active actions as yet? Official and unofficial calls to disclose System interconnectivity Forthcoming additional reporting obligations Forthcoming change of Anti-Money Laundering Laws 41
Taxation of Trusts 3G Abolishing non-resident trust for the benefits Israeli beneficiary; Additional reporting obligation; Taxation of trust which were not taxed earlier What to do? Remove Israeli beneficiaries Appoint contingent beneficiaries upon death New and Returning Residents as beneficiaries Do not distribute Transfer liability to resident beneficiaries Distribute shares / assets (but then note reporting) Report not that complicated Come to agreement with the ITA 42
New / Returning Residents Israel as an escape? Forthcoming reporting obligations Trust for the benefits of New and Returning Residents Use of offshore companies by returning residents No one can delete the past purchased residency not a possibility Transfer of assets without change of residency 43
Taxation of Trusts with New and Returning Residents New Immigrant / Returning Resident as settlor New Immigrant / Returning Resident as beneficiary Relatives Trust Reporting obligations annual reports v. notices Implication of transfer of assets out of the trust / foundation 44
Voluntary Disclosure Framework Possible Routes Application before Assessing Officers in the whole country (except trusts) Anonymity? What s coming soon? Three main Scenarios, completely different results: 1. Active Income 2. Passive Income Gift, Inheritance etc. 3. Trusts, Foundations, Special Relationship - Special (and better) treatment Procedure 45
Voluntary Disclosure Client discussion Topics Communications with advisors Timeframe Become a partner - involvement and updates Maintaining relationship Your possible benefits 46
Voluntary Disclosure how do we do it? The ROSAK Arzi Hiba Elmekiesse Cooperation Before Meeting with RM and/or client (in Zurich /Tel Aviv; can be anonymous) Paperwork preparation Phase A During - phase B Insurance policy - removing criminal liability Length of process Capital Discussions Settling civil infringements Signing and paying The day after Reporting communication 47
Thank you! inbal@rosak-law.com www.rosak-law.com +41 43 501 0500 +972 3 608 14 51 48
Biography - Inbal Faibish Wassmer Inbal is an advocate admitted to the Israel Bar in 2005 and is the head of the Zurich Branch of Rosenberg Abramovich Keren-Polak Epelman, advocates. Inbal obtained both a law degree and a Bachelor in Economics from the University of Haifa (LLB, 2003; BA econ. 2003). She also a Master in Law and Economics from the Erasmus Mundus Program in Law and Economics (University of Bologna, Italy and University Paul Cézannes, Aix-Marseilles III, France, 2005) and Master in Law from the University of Haifa (LLM, 2005). Inbal specializes in commercial law, international taxation, trusts, insurance and wealth planning, and advises private and institutional clients worldwide. She lectures and regularly on taxation and wealth planning topics on various professional forums, and participates in various publications on taxation topics. Inbal is a board member of the Switzerland Israel Chamber of Commerce, and also a member of the Society of Trust and Estate Practitioners (STEP), the International Bar Association, the American Bar Association and the International Fiscal Association (IFA). 49