TAX CONSIDERATIONS FOR POTENTIAL NEW IMMIGRANTS AND RETURNING ISRAELI RESIDENTSCategory: Business/Law Issue No. 151
In a stunning reversal of previous policy, the Israel Tax Authority recently supported a series of amendments to the Income Tax Ordinance providing significant tax incentives to new immigrants (“olim chadashim”) and former residents returning to live in Israel (“toshavim chozrim”).
In discussions with the Tax Authority’s representatives, it emerged that the Tax Authority recognized the value of providing financial incentives to encourage potential immigrants and former residents to return to Israel. The new change in the existing tax treatment of both groups is intended to act as a catalyst to substantially increase the number of new immigrants and returning residents over this decade and the next.
Total Tax Exemptions
The most dramatic of the changes provides for a ten year period of total tax exemption from Israeli taxation on any and all income including interest, dividends and capital gains derived from foreign, non-Israeli sources. The ten year period doubles the previous five year period of tax exemption on non-Israeli sourced income. In addition to the non-Israeli sourced income being completely exempt from Israeli tax, the income will also be exempt from any requirement to report the income to the Israel Tax Authority.
Period of Adjustment Tax Grace
No less important is the creation of a one year period of tax grace referred to as a “Period of Adjustment”. This one year period is intended to allow both potential new immigrants and returning residents to reside in Israel for up to one year without being considered residents of Israel for tax purposes. During the course of the year, the potential new immigrant or returning resident will be able to evaluate whether both they and their families are likely to make a successful transition to living in Israel. If, at the end of the period, they choose to remain in Israel then they will enjoy a further nine years of complete tax exemption from non-Israeli sourced income. If, on the other hand, they decide not to remain in Israel, they will not be subject to a series of potentially onerous tax provisions upon their exit.
Preferential Rates of Interest
These changes complement the existing tax provisions providing the new immigrant with preferential rates of interest on funds placed on deposit with Israeli banks as well as certain tax exemptions on the interest derived. In years past, the new immigrant (as well as the non-Israeli resident) may have been deterred from establishing large deposits in Israeli banks owing to the lack of any formal government sponsored insurance system. However, during the current global financial crisis, Israeli banks have proved to be remarkably resilient, particularly by comparison with many of their overseas counterparts. In addition, it should be noted that when the Israeli banking system was severely shaken by the stock market crisis of 1981, the Israeli Treasury and the Bank of Israel decisively intervened to protect the banks. Fortunately, such intervention has not been necessary during the current financial crisis.
For the immigrant or returning resident entrepreneur, there is an additional change in the tax law of significant value. A business entity, corporate or otherwise, in which the new immigrant or returning resident holds an interest, even a controlling interest, will not become subject to Israeli taxation solely as a result of the establishment of Israeli residency by the shareholder. In other words, if the business entity does not conduct business operations in Israel, the fact of its controlling shareholder having relocated to Israel will not subject the business entity to Israeli taxation. In addition, the business entity shall not be required to file reports of income with the Israel Tax Authority in respect of non Israel sourced income.
Differential Treatment for RIR in 2008-2009 + 2010
The treatment of the returning Israeli resident (or “RIR”) is quite interesting. A sharp distinction is drawn between those RIRs returning during calendar years 2008 and 2009 and those returning as from January 1, 2010 onwards.
For those RIRs returning in 2008 and 2009, a period of residence abroad of only five years abroad will be enough to endow them with the ten year tax exemption period on non-Israeli sourced income and reporting. However, as from January 1, 2010, the period of foreign residence required will double to ten years. Of course, the possibility always exists that the Israel Tax Authority may decide to extend the five year foreign residency beyond the end of this year. For the time being, however, such an extension appears not to be under formal consideration.
Accountability as US Citizens
While on the subject of returning Israeli residents, the following point should be noted. If the RIR has acquired U.S. citizenship or arguably even “green card” status, the return to Israel will not operate to exempt the RIR from the duty to continue to file tax returns with IRS, the U.S. Tax Authority. Indeed, all U.S. citizens remain accountable to IRS irrespective of the length of the period that they may have resided outside the U.S. and in Israel, for example. This is in sharp contrast to both Canadian citizens and citizens of the United Kingdom both of whom can over time free themselves from such accountability via resort to offshore status.
No Death/Inheritance Tax
No tax review would be complete without pointing out that the State of Israel has absolutely no Death or Inheritance Tax whatsoever. Over twenty eight years have passed since the abolition of the said tax. During that time, the State of Israel has established a value added tax, imposed tax on stock market gains, pensions and other forms of savings. However, the abolition of the Death or Inheritance Tax has remained intact. Even now, as Israel experiences a severe economic downturn precipitated by the global financial crisis, there is no support for the reimposition of a Death Tax. The implications of this non-tax particularly for wealthier individuals are obvious.
In conclusion and for the sake of good order, it bears repeating that no decision with respect to one’s financial planning should be taken without the benefit of individual professional advice and counsel furnished by a professional having the requisite expertise and experience.
This article is for informational purposes only and is not a substitute for specific advice, legal or financial, based on individual consultation.
Attorney Kahn has practiced law in Israel and The United States for over 35 years. He is a member of the International Society of Trust and Estate Practitioners.
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