Israeli Bare Trusts, Nominees, and Taxation

What is an Israeli bare trust? What’s the difference between a trustee and a nominee? How do the Israeli Tax Authority view a bare trust?

A bare trust is a basic trust in which the beneficiary has the absolute right to the capital and assets within the trust, as well as the income generated. Sometimes it would be fair to say that the Trustee is simply acting as a nominee or representative of the beneficiary.

Whilst the Israeli Tax Ordinance has a section specifically dedicated to the taxation of Trusts, there is no clear definition or tax treatment for bare trusts. So, is a bare Trust treated for tax purposes as a ‘Trust’ or more like a ‘Nominee arrangement’?

What Israeli tax compliance is required of an Israeli trustee?

Chapter 4 of the Israeli Income Tax Ordinance details the compliance requirements regarding the taxation of various types of trusts. A « Trust » is defined as an arrangement whereby a trustee holds an asset for the benefit of a beneficiary, whether the arrangement is in Israel or outside Israel. The Trustee would be required to report the creation of the Trust, the annual income and any distributions.

What Israeli tax compliance is required of a Israeli bare trustee?

Should a bare trustee meet the necessary requirements, the Israeli Tax Authority would view the Trustee as merely a nominee of the beneficiary. In this event, for the purposes of Israeli taxation, there would be no trust and both the asset and the income belong to the beneficiary directly.

More on: Taxation of Israeli Trusts

Case Study

On 3.10.2021, the Tax Authority issued a taxation decision in Agreement No. 5594/21. The circumstances were as follows:

A company requested a preliminary tax opinion regarding a nominee which they had appointed. The Israeli company established business activities in a foreign country via a locally incorporated subsidiary (hereinafter: the « foreign company »). For various reasons, the Israeli company was not keen to publicly share its identity as a shareholder in the foreign company. Therefore, it transferred the shares of the foreign company to an individual to hold on it’s behalf.

In 2018, a Deed of Trust was signed between Israeli company and the individual, a resident in Israel with foreign citizenship. The Trustee themselves was not a material shareholder in the company and had no control over it.

The company sought to confirm that although this is a Trust agreement, the provisions of the trust chapter in the ordinance will not apply to it. They also wanted to ensure that the trustee would not be required to report this holding to the tax authority as their own.

As part of the tax decision, the Tax Authority approved the company’s application, and determined, inter alia, as follows:

The conditions agreed:

1. The provisions of Chapter 4 of the Ordinance shall not apply to the relationship between the Trustee and Israeli company. Also, the company itself will not be considered a settlor/grantor or beneficiary. Likewise the Trustee will not be considered a Trustee but a nominee of the company.
2. The obligation to report under section 131 (a) (5b) of the Ordinance does not apply to the Trustee, who is only the nominee of the Israeli company.
3. All income and profits received by the Trustee will be transferred to the Israeli company and will be reported by it in the year in which they were received or accrued. The Israeli company will report its holdings in the foreign company holding the foreign company’s shares for it and will be considered the shareholder in the foreign company holding.
4. In the case of a foreign tax credit for the Trustee as the representative of the Israeli company, the amount of the credit will be the lower of either the tax rate stipulated in the convention and the provisions of domestic law in the holding foreign country, and the amount of tax actually paid to the tax authorities in the holding country.
5. The provisions of the taxation decision shall apply as long as the Trustee is a resident of Israel and as long as there is no change in the holding rate.

How to ensure not to create an Israeli taxable trust structure?

Trusts can be a complex area. If you intend to setup a bare trust structure it would be vital to take detailed advice prior to the movement of any assets. Additionally, any action which would strengthen the position as that of a nominee should be put in place. In general terms, full disclosure should be made by the beneficiary at the time of receiving/acquiring the asset and likewise on any annual reporting.