Important Israeli court ruling on the taxation of trusts

The Tel Aviv District Court has rejected the Israel Tax Authority’s (ITA’s) position that the transfer of real property into an Israeli residents’ trust is taxable as a sale of a right in land.

The case concerned some Canadian residents who established a trust for their Israeli granddaughter, and transferred several Israeli properties into it without consideration.

The settlors’ report to the ITA argued that the trust should be classified as an Israeli residents trust or an Israeli resident beneficiary trust. Under the income tax ordinance (ITO), this ensured that conveyance of the property to the trust did not represent a taxable transaction.

However, the ITA disagreed. It argued that Income Tax Circular 3/2016 classified the conveyance as the sale of a right in land, making it subject to the Real Estate Taxation Law, and liable to purchase and betterment taxes as if it were a gift of real estate direct to a beneficiary.

The Canadian settlors appealed, and the Tel Aviv District Court upheld their appeal. It ruled that section 75 of the ITO makes no distinction between the conveyance of assets, whether real estate in Israel, real estate abroad, or securities. Thus the transfer of real estate properties to a trust of Israeli residents without consideration does not constitute a tax event.

Moreover, the court also stated that a change to the trust’s beneficiaries does not constitute a tax event either, as long as the trust assets have not been distributed. This too contradicts the ITA’s stated position.

If upheld, the ruling ‘dramatically alters the possible avenues to be taken for the correct tax planning of trusts’, commented Harel Perlmutter of Tel Aviv law firm Barnea Jaffa Lande . However, the ITA is now expected to appeal the case to the Supreme Court.