Israel at 60: Tax benefits for olim and returning residents

By Leor Nouman and Chaim Wigoda

Tel Aviv — Moving to a new country can be stressful; particularly a country with a difference climate, culture and primary language. In an effort to increase aliyah from North American, the Isreali government is taking an active role in improving that situation for potential olim and former Israeli residents.

The number one reason for an unsuccessful aliyah is because of the financial strains placed upon the oleh.

To battle the financial strains, the Knesset ratified a new law on September 16, 2008. Back-dated to 2007, olim and returning residents (people who lived abroad for more than 10 consecutive years) now have several new entitlements available to them.

Practically speaking, the government is offering olim and returning residents a similar status to what the UK calls Non-Domicile status. The main components of the new legislation include: clarifying the resident-test rules; granting a tax exemption for a period of 10 years for all types of foreign income — at least double the exemption period offered to those that made aliyah prior to January 1, 2007; granting an exemption from filing tax reports for 10 years; and providing retroactive application from 2007.

It is important to note that the source of income may not be clear in some cases. Sending emails, making and receiving telephone calls, monitoring a distant business via computer in Israel, and other factors, may impact the determination of source.

The Israeli tax authorities may argue that in many cases the income can be deemed derived, in whole or in part, from Israel and in such cases, the exemptions do not apply.

According to the new legislation, residency conditions will now include a definition of what constitutes a foreign resident and in turn, better determines the date on which an individual was deemed to be a foreign resident.

To be considered a foreign resident, one myst not have his center-of-life in Israel. Alternatively, a person is deemed a foreign resident if :

a) the person spent at least 183 days outside of Israel during two tax years and

b) the person’s center-of-life during an additional two years was not in Israel.

Unlike the old rules, one may benefit from the tax exemption whether or not they held a foreign asset relating to the income prior to becoming an Israeli resident.

To further simplify the decision, a new oleh may choose not to be regarded as an Israeli resident for his or her first year in Israel, commencing from the date of arrival (“the Adjustment Period”). Should that person decide to stay and make aliyah after the year, the Adjustment Period would be counted as the first year of the ten.

In order to qualify for the Adjustment Period, one must advise the tax authorities within 90 days of arrival. The Adjustment Period may help in tax planning because during this period one is still regarded as a foreign resident. For returning residents this status may be more complicated. Careful planning is required in either case.

If you own a company operating outside of Israel, the new rules protect the status of the company. Previously, according to the Israel Tax Office (ITO), even if a company was incorporated under foreign law, but managed and controlled by an individual(s) who was an Israeli resident(s) for tax purposes, the tax authorities would regard that company as an Israeli taxable company. However, the new legislation has changed that rule. Now, if the foreign company is controlled by a new oleh or by a returning resident, then company will still be regarded as a foreign resident company for tax purposes. This status will remain for the period of 10 years commencing from the date on which the new oleh became an Israeli resident for tax purposes.

Despite these new tax and financial incentives, it is important to carefully plan your move. Without proper planning, the new oleh or returning resident could be subject to exit taxes and ongoing withholding and income taxes from the country-of-origin. These taxes could go a long way to neutralize the benefits of the Israeli tax holiday.

Furthermore, one has to properly structure one’s affairs in order to properly fit into the new Israeli rules and enjoy 10 years of tax holiday.

It is important to note that this is still a very complicated part of tax law and the tax authorities have the final word on what is deemed as derived in whole or part from Israel or abroad.

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