Judgment Samuel Galis - Transfer Of Real Estate Asset In Israel Into A Trust Is Not A Tax Even

Author:Mr Yoad Frenkel, Orit Koch and Ori Nahari
Profession:Ziv Sharon & Co

On July 24, 2019, judgment 49026-07-17 Samuel Galis Vs. Director of Land Appreciation Tax Tel-Aviv 1 (hereinafter: "The Galis Case") has been issued, whereby is was determined that the transfer of real estate into a trust will no longer be considered as a tax event, contrary to the Israeli Tax Authority's (ITA) position, as provided in section 13 of Circular 5/2016 regarding the Taxation of Trusts (the "Trusts Circular").

The Tel Aviv-Jaffa District Court, sitting as an Appeals Committee under the Real Estate Taxation Law (Appraisal and Acquisition), 1963 (hereinafter "RETL"), rejected the ITA's position and held that the arrangement stipulated in Chapter Four "B" of the Israeli Income Tax Ordinance [new version] 5721-1961 (ITO), which deals with trusts, regarding the transfer of real estate assets in Israel to a trustee, should be applied in accordance with section 3 of the RETL.

The appellants, Samuel and Ziza Galis (foreign residents), and Begin Trust 2015 Ltd (respectively: the "Settlores" and the "Trust", and together the "Appellants") created a Trust in Israel for the Settlors' granddaughter, an Israeli resident (the "Beneficiary"). The Settlors transferred four real estate assets in Israel into the Trust.

The main points of the trust agreement determined:

The assets of the Settlors will be transferred to the trustee by irrevocable transfer; The trustee will act in the favor of the Beneficiary's interest, at his sole discretion and he will decide if and when to distribute the assets and the proceeds of the Trust to the Beneficiaries; The Beneficiary is not aware of the existence of the Trust, and that she is a beneficiary in it, and the Trust must be kept secret; The trustee shall be bound by the instructions of the protector, who was appointed in order to keep the interests of the Beneficiary (the "Protector"). According to the trust agreement, the Protector is authorized to dismiss the trustee and appoint a new one, and to add or remove beneficiaries - at the will of the Settlors. The Settlors reported the transfer of rights in the assets to the trustee and declared it in a self-assessment for the Trust under sections 75C and 75G(d) of the ITO as a tax exempted grant. The Appellants took the position that under these sections transfer of real estate assets located in Israel into an Israeli Residents Trust, carried out without any consideration, shall not be deemed as a sale. In addition, and despite the fact that section 75G(d)...

To continue reading