An accountant calculator taxes 370.
(photo credit: Ivan Alvarado / Reuters)
Reports have circulated over the past week that the tax breaks for olim are
about to end. The result has ranged from confusion to outright anger. Is the
Israeli government going back on its word? Don’t they want an ingathering of the
exiles? Many immigrants are rich and/or smart and have much to contribute to
So what is really going on? In short, poor communication and a
little shortsightedness. It all revolves around the government’s budget that is
intended to plug a NIS 40 billion deficit, which suddenly mattered after the
First we had a set of Treasury resolutions, and now we
have a draft bill that will soon go to the Knesset for debate.
to be seen what will be enacted. It is sure to be a bumpy ride.
10-year tax holiday
Currently, under today’s law, new residents and “senior
returning residents” (who lived abroad 10 years) currently enjoy a 10-year
exemption from Israeli tax on overseas income and gains (“tax holiday”). They
are also exempt from reporting such overseas income and gains as well as
overseas assets. After all, why report them if they are exempt from Israeli tax?
Under the budget proposals, the tax exemption would NOT be impacted, but the
reporting exemption would be repealed. In other words, olim will continue to pay
zero tax on overseas income and gains, but they will have to start disclosing
them on annual tax returns.
This sudden attack of bureaucracy is being
blamed on pressure from the OECD’s Global Forum on Transparency and Exchange of
Information for Tax Purposes. It seems Israel might be asked to transfer details
of overseas income to other countries. Israel joined the OECD in
However, the OECD model tax treaty and supporting commentary says
that countries “are not at liberty to engage in ‘fishing expeditions’ or to
request information from another country that is unlikely to be relevant to the
tax affairs of a given taxpayer” (commentary on model treaty Article 26).
Therefore, information requests are few and far between, as they must relate to
specific serious cases already under investigation.
process of uprooting and migrating to Israel is not easy. There is no point in
making olim fill out tax returns for no reason.
In reality Israel ought
to be able to put off such pressure.
Within the EU there is freedom of
And when UK residents migrate to the US, does the IRS report
each person’s worldwide income to the UK HMRC? (Don’t bother
The Israeli budget proposals also make
dramatic changes to the trust tax regime. According to reports, certain persons
have used overseas professional people to settle a trust for their benefit. So
the budget proposals aim to tax trusts where the beneficiary has no family
relationship to the settlor.
This is unfortunate because it is not
uncommon to benefit unrelated friends; for example, if a rich elderly person has
no children, or family members died due to hostile action.
And what about
charitable trusts? The (ITA) has consistently failed to offer any clarification
on their tax treatment despite many requests over the years.
If the Bill
and Melinda Gates Foundation makes an award to an unrelated Israeli resident,
will the foundation be swept into the Israeli tax net under the proposals? The
budget proposals go further by proposing to tax almost every trust with an
Israeli resident. Fortunately, this should not apply during the 10-year tax
holiday of the beneficiary if that person is an oleh.
Does all this
matter? According to Bank of Israel statistics, more than $3 billion flows to
individuals in Israel from abroad every year. Many transfers are gifts, but some
of the larger amounts are thought to be via trusts.
The great dictator If
you take a position that differs from a published instruction of the ITA
regarding the interpretation and implementation of the tax law, you must say so
on a form according to the proposals. Otherwise, you could be liable to a fine
of 30 percent of the tax deficiency. There is no mention of judicial or other
review. This means the ITA is taking upon itself legislative, executive and
In most countries this might be considered
To sum up The 10-year tax exemption for overseas income
of olim is not under fire, but the reporting exemption is in danger of repeal
under the budget proposals. Don’t stop your aliya.As always, consult
experienced tax advisers in each country at an early stage in specific
Leon Harris is a certified public accountant and tax
specialist at Harris Consulting & Tax Ltd.