The chapter on trusts in the Israeli Tax Ordinance affords the status of a taxpayer for tax purposes to a trust (including a registration number, a managed file in an assessing office etcetera), even though the trust itself is not an independent legal entity but is rather a legal arrangement, generally between a settlor and a trustee.
Part of that same status is its residency status for tax purposes. The provisions of the Israeli Tax Ordinance determine in relation to each of the types of trusts when the trust is to be viewed as an Israeli resident individual (“An Israeli trust”) and when it is to be viewed as a foreign resident individual (“A foreign trust”). Thus for example, in connection with an “Israeli residents’ trust”, it is determined that “An Israeli Residents’ Trust will be considered to be resident in Israel, and the income of the trust will be viewed as the income of an individual who is a resident in Israel and the trustee’s assets as the assets of an individual who is a resident of Israel”. In connection with a “Foreign Residents’ Trust”, for example, it is determined that “A Foreign Residents’ Trust” will be considered to be a foreign resident and the trustee’s assets will be viewed as assets that are held by a foreign resident and the trustee’s income as income of a foreign resident individual”.
A trust may change its residency where there is a change in the particular circumstances, such as the addition of a beneficiary, a change in the revocability terms, and of course where there is a change in the residency of a settlor or a beneficiary, as the case may be. Thus, for example, in a trust pursuant to a will (a “Will Trust”) in which there is a beneficiary that is resident of Israel who becomes a foreign resident, the trust will change its classification (and accordingly its residency) from an “Israeli Will Trust” to a “Foreign Will Trust”, at the time at which it is determined that the exit tax provisions will apply, mutatis mutandis.
A change in the residency of individuals (primarily in the direction of leaving Israel) is a complex issue, which has been discussed every now and again within the context of various judgments, tax decisions and other professional directives, as well as in numerous discussions that have been held between representatives and the tax authorities.
The Tax Authority is contemplating the issue at the present time, with the intention of changing the tax residency rules in respect of an individual, such that instead of the substantive test of “center of life”, it will include technical and measurable tests (primarily the index of the days of presence), which will constitute absolute (irrefutable) assumptions. This change will lead to certainty regarding the timing of the severance of the tax residency for the purposes of the provisions of the Ordinance (internal law) on the one hand and on the other hand it will expand the array of cases in which the individual will be deemed to be an Israeli resident in accordance with the provisions of the Ordinance but as a foreign resident in accordance with the provisions of a relevant treaty country. These cases may include circumstances in which, for example, the individual is a resident in a foreign country but visits Israel a lot for whatever reason.
The question arises – what is the law in respect of a trust in which the settlor or the beneficiary has changed their residency in a manner and in circumstances, which are also supposed to change the trust’s residency (see above), however the severance of residency is done solely in accordance with a treaty and not in accordance with the provisions of the Ordinance?
There is no clear answer to this. Our position is that in such a case the residency of the trust is to be changed from an Israeli trust to a foreign trust. This position is based on the assumption that the provisions of the trusts chapter were intended to visualize a legal situation that would exist were the assets are held by the settlor or the beneficiary and not by the trustee. In such case, the income of someone who has severed its residency in accordance with a treaty, wouldn’t be taxed.

The Tax Authority may claim, on the other hand, that the “tiebreaker” conditions that are included in the tax treaty relate solely to the place of residence of individuals and not to entities that are not individuals, including trusts. Moreover, in treaties in which trusts are explicitly mentioned, there is no clear solution, since sometimes a trust is simply included in the term “person” in a general and ambiguous manner (for example – in the treaty with Canada), or it is determined in a treaty (including in a protocol to a treaty) that in the case of double residency, the matter will be decided by way of mutual agreement (for example in the treaties with Austria, Panama and Malta).

As mentioned above, because of the expectation that there will be a multitude of situations in which the severance has been made in accordance with a treaty alone, this issue is expected to have an honorable place in discussions that are held with the tax authority on the subject.