The Tel Aviv District Court handed down a decision a few days ago rejecting the Israel Tax Authority’s (ITA) position on the conveyance of real estate properties to trusts. This decision dramatically changes the taxation of trusts in Israel.

The decision considers a matter involving out-of-country residents (of Canada) who established a trust for their Israeli granddaughter. The Canadians also conveyed several real estate properties in Israel to the trust without consideration.

In their report to the Israel Tax Authority, the Canadians claimed that under the Income Tax Ordinance (ITO), this trust should be classified as “Israeli Residents Trust” or a Israeli Resident Beneficiary Trust”, and thus there was no taxable transaction (or “tax event”) in the conveyance of the property to the trust.

The ITA maintained, however, that under Income Tax Circular 3/2016, such conveyance is subject to the Real Estate Taxation Law and is viewed as the sale of a right in land. It is therefore subject to purchase and betterment taxes, similarly to when a conveyance of real estate to a beneficiary is also subject to purchase and betterment taxes.

The Tel Aviv District Court’s Appeals Committee rejected the ITA’s position and found that there is no distinction between the conveyance of assets, be they real estate in Israel, real estate abroad, or just stock. Therefore, in accordance with section 75 of the ITO, the conveyance of real estate properties to a trust of Israeli residents without consideration does not constitute a “tax event.”

Additionally, the Appeals Committee emphasized that not only does the conveyance of a real estate property to a beneficiary not constitute a “tax event,” but also  that the changing of beneficiaries of the trust does not constitute a “tax event” as long as the trust assets have not been distributed. This contradicts the ITA’s position, both as expressed to the Appeals Committee and as reflected in the above circular.

The Appeals Committee decision dramatically alters the possible avenues to be taken for the correct tax planning of trusts.

Now, after a new world has opened up in this regard, it will be interesting to see whether the ITA appeals this decision (which is likely), and, if so, how the Supreme Court may come down on the issue.