1) The document discusses the tax implications of transferring real estate properties to a trust in Israel. It notes that transferring properties to a trust for beneficiaries who are not the owners would be considered a taxable event under Israeli real estate tax law. 2) An example is provided of parents transferring two apartments to their daughters through a trust to receive tax benefits. Establishing the trust allows the transfer to be considered a tax-exempt gift and reduces the applicable purchase tax. 3) The document also discusses using a trust structure to potentially reduce tax rates on interest income from loans to companies. Placing loans in a trust could allow interest to be taxed at standard rates rather than higher marginal rates that would apply to direct loans

1. Artzi,Hiba,Elmekiesse,Cohen
www.ahec-tax.co.il
STEP CONFERENCE
Trusts as a Tax Planning
Instrument
Artzi, Hiba, Elmekiesse, Cohen - Tax Solutions
Ltd.
23.06.2015
1
Ran Artzi, CPA - Managing Partner

2. Artzi,Hiba,Elmekiesse,Cohen
www.ahec-tax.co.il
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
2

3. Artzi,Hiba,Elmekiesse,Cohen
www.ahec-tax.co.il
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
3

4. Artzi,Hiba,Elmekiesse,Cohen
www.ahec-tax.co.il
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.
Real Estate Taxation Law –
quotation of relevant sections
4

5. Artzi,Hiba,Elmekiesse,Cohen
www.ahec-tax.co.il
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).
Real Estate Taxation Law –
quotation of relevant sections
5

6. Artzi,Hiba,Elmekiesse,Cohen
www.ahec-tax.co.il
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
Real Estate Taxation Law
6

7. Artzi,Hiba,Elmekiesse,Cohen
www.ahec-tax.co.il
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).
Real Estate Taxation Law
7

8. Artzi,Hiba,Elmekiesse,Cohen
www.ahec-tax.co.il
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.
Real Estate Taxation Law
8

9. Artzi,Hiba,Elmekiesse,Cohen
www.ahec-tax.co.il
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
9

10. Artzi,Hiba,Elmekiesse,Cohen
www.ahec-tax.co.il
Restricted tax rates for interest on loan
that is granted within a trust structure
10
Company
Individual
100%
Brother
Loan
granting
Interest with respect to both of the loans is subject to the marginal tax rate
Loan
granting

11. Artzi,Hiba,Elmekiesse,Cohen
www.ahec-tax.co.il
Restricted tax rates for interest on loan
that is granted within a trust structure
11
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%

12. Artzi,Hiba,Elmekiesse,Cohen
www.ahec-tax.co.il
Restricted tax rates for interest on loan
that is granted within a trust structure
12
Israeli
Company
Individual
Brother –
Settlor and
beneficiary
100%
Loan
granting
relatives
trustee
not
relatives
relatives
Trust
X

13. Artzi,Hiba,Elmekiesse,Cohen
www.ahec-tax.co.il
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.
Restricted tax rates for interest on loan
that is granted within a trust structure
13

14. Artzi,Hiba,Elmekiesse,Cohen
www.ahec-tax.co.il
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).
Restricted tax rates for interest on loan
that is granted within a trust structure
14

15. Artzi,Hiba,Elmekiesse,Cohen
www.ahec-tax.co.il
The use of Section 75G(G) – distributions
to beneficiaries
15
Father –
Foreign Settlor
Son –
Israeli Beneficiary
Daughter - new Immigrant /
Long term or regular returning resident at
2012 (“qualified individual”)
Beneficiary
Trust

16. Artzi,Hiba,Elmekiesse,Cohen
www.ahec-tax.co.il
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
16

17. Artzi,Hiba,Elmekiesse,Cohen
www.ahec-tax.co.il
The use of Section 75G(G) – distributions
to beneficiaries
17
Father - Settlor
(immigrated to Israel during 2015)
Son –
Israeli Beneficiary
Trust
Daughter – Qualified
individual at 2012

18. Artzi,Hiba,Elmekiesse,Cohen
www.ahec-tax.co.il
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.
The use of Section 75G(G) –
distributions to beneficiaries
18

19. Artzi,Hiba,Elmekiesse,Cohen
www.ahec-tax.co.il
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.
The use of Section 75G(G) –
distributions to beneficiaries
19

20. Artzi,Hiba,Elmekiesse,Cohen
www.ahec-tax.co.il
 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.
The use of Section 75G(G) –
distributions to beneficiaries
20

21. Artzi,Hiba,Elmekiesse,Cohen
www.ahec-tax.co.il
Thank you
21
Ran Artzi, CPA - Managing Partner
artzi@ahec-tax.co.il
Artzi, Hiba, Elmekiesse, Cohen - Tax Solutions Ltd.
23.06.2015