In Short: Everything Is liable to Tax
At the end of 2025, the Israeli Tax Authority (the “ITA“) published the Reportable Positions for that tax year in the areas of income tax and VAT, following two consecutive years in which no such positions were published due to the security situation in Israel. As in prior years, the publication was preceded by discussions and exchanges of position papers between the professional chambers and the ITA, in which our firm also took part, representing the Israeli Institute of Tax Consultants on these matters.
One of the positions published in the area of trust taxation is Position 114/2025, which is discussed below. Beyond its specific subject matter, this position appears to reflect the general approach adopted by the ITA in recent years, and in particular in relation to trust taxation- namely, a restrictive interpretation and strict adherence to the statutory wording where it serves the ITA’s collection interests.
Position 114/2025: the Application of Section 75G(e) of the Income Tax Ordinance (the “ITO“) to a “Relatives Trust” that becomes an Israeli Residents Trust following the immigration or return of the settlor to Israel
(For simplicity, below we refer to both a new immigrant and a veteran returning resident as an “immigrant”)
General Background
As a general rule, Section 75G(e) of the ITO provides that a trust which becomes an Israeli Residents Trust as a result of the settlor’s immigration to Israel is entitled to the same tax exemptions granted to immigrants, provided that all beneficiaries are immigrants or foreign residents.
This provision also applies, by its wording, to a Relatives Trust (which by definition includes an Israeli resident beneficiary) that becomes an Israeli Residents Trust following the settlor’s immigration.
If, prior to the immigration, the Israeli beneficiary of the trust was himself an immigrant, the section allows the continuation of the tax benefits for the remaining benefit period of that beneficiary. Conversely, if the Israeli beneficiary is not an immigrant but an ordinary Israeli resident, the settlor’s immigration does not allow the extension of the immigrant tax benefits to the trustee. This is due, inter alia, to the conceptual rationale that the trust was already taxable with respect to the beneficiary’s share even prior to the settlor’s immigration.
At the same time, Section 75G(h) of the ITO provides that, in an Israeli Residents Trust and subject to certain conditions, the settlor and the trustee may elect that the settlor be treated as both the assessable and taxable person. In such a case, all trust income is fully attributed to and reported in the settlor’s tax file, as if it was his own income for all purposes- including loss offsets, applicable tax rates, and also immigrant tax benefits, where relevant.
The ITA’s Position
The ITA takes the view that the same restriction which denies immigrant tax benefits where not all beneficiaries are immigrants or foreign residents continues to apply even when a Relatives Trust becomes an Israeli Residents Trust following the settlor’s immigration.
The ITA further emphasizes that the election by the settlor (and trustee) to attribute the trust income to the settlor under Section 75G(h) cannot override this restriction. In other words, the settlor may not apply his immigrant tax exemptions to trust income attributed to him.
This position is based on the (allegedly logical) premise that there is an Israeli beneficiary in a Relatives Trust, and part of the trust income attributable to that beneficiary is taxable in Israel- either under the current taxation track at a rate of 25%, or under the distribution track at a rate of 30%.
Accordingly, the settlor’s immigration to Israel cannot “upgrade” that income and recharacterize it as exempt merely due to the settlor’s immigration, if that income was taxable while the settlor was still a foreign resident.
Implications and Counterarguments
However, it is important to note that under the ITA’s position, not only is its right to tax the Israeli beneficiary’s share preserved after the settlor’s immigration, but the denial of the attribution alternative under Section 75G(h) significantly worsens the theoretical share of other beneficiaries in the trust.
For example, in a Relatives Trust with one Israeli beneficiary and five foreign resident beneficiaries, only the Israeli beneficiary’s share is taxable. Following the settlor’s immigration- and due to the inability to attribute the trust income to the settlor- the entire trust income becomes taxable, not only the portion attributable to the Israeli beneficiary.
If the ITA’s concern was that it might lose its pre-immigration taxing rights over income accrued while the trust was a Relatives Trust, merely because the settlor elected the attribution alternative under Section 75G(h), such concern is unjustified in light of Section 75H1(i) of the ITO.
This provision, which forms part of the Relatives Trust taxation regime, preserves the taxing rights over income accrued during the period in which the trust was classified as a Relatives Trust, even in the circumstances described above, including where the attribution alternative under Section 75G(h) is elected.
From a substantive perspective, the attribution of trust income to the settlor under Section 75G(h) is not a procedural maneuver designed to bypass the restriction described in the position. Rather, it gives effect to the fundamental principle governing Israeli Residents Trusts under Section 75G(b), according to which the assets and income of such a trust are treated as the assets and income of the settlor. From this conceptual standpoint, there is no distortion or loophole in attributing the trust income to the settlor for purposes of granting immigrant tax benefits.
Moreover, after immigration, a new immigrant may establish a trust for beneficiaries who are not all immigrants or foreign residents and still elect, within the statutory timelines, the attribution alternative under Section 75G(h), thereby enjoying a full exemption on the income. In such a case, the position described above would not apply at all. This result is not distorted, but rather consistent with the underlying principle that the trust’s assets and income are treated as those of the settlor.
Procedure Once Again Prevails
Nevertheless, the ITA could ostensibly insist on its position and deny (lawfully, though arguably unfairly) the attribution alternative under Section 75G(h) in the circumstances described.
Section 75G(h) provides that “such a request shall be submitted to the assessing officer together with the tax return under Section 131 for the tax year in which the trust was created”. In the case addressed by the position, no return is filed for the year in which the trust was created, since at that time the trust is not an Israeli Residents Trust.
Still, rejecting this alternative on such a procedural basis is unfair, and it would have been preferable to allow a late election following the settlor’s immigration. The ITA is expected to publish a professional circular regarding Amendment 272 to the ITO (abolishing reporting exemptions for new immigrants). Part of that circular addresses elections that a new immigrant may make after the statutory deadlines, such as allowing, in certain cases, a company to be classified as a Family Company (which is transparent for tax purposes) only after the immigrant’s benefit period ends- well beyond the 90-day post incorporation deadline set forth in the law. That same framework could have been used to allow the income attribution election even after the year of the trust’s creation.
Is All Lost?
In many cases, a simple step, taken either before or after immigration, can neutralize the application of the position described above. Nevertheless, the preferable outcome would have been for the ITA itself to allow the income attribution alternative to the settlor, even through approval of a late filing, inter alia in order to avoid unnecessary tax planning and to create neutrality for the settlor, as has been done in many other contexts.
Our firm has extensive experience in tax advisory services relating to trusts and intergenerational wealth planning, including advance planning to prevent tax pitfalls and distortions that frequently arise in this area. Proper advice should be obtained before undertaking any action or adopting any position.
For further details, please contact us.
Eyal Sando, CPA (LL.B.)