Your Taxes: Tax breaks for returning residents

It may now pay to stay away a bit longer to get better tax breaks when you return.

By LEON HARRIS
May 31, 2011 22:35
illustrative

taxes. (photo credit: courtesy)

Israel’s tax law is not noted for its clarity. A particularly confusing area relates to returning residents. The government’s policy is to grant tax breaks to encourage individuals who left Israel to come back. But the rules have changed several times, and it may now pay to stay away a bit longer to get better tax breaks when you return.

If you were gone 10 years Effective January 1, 2007, “new residents” and “senior returning residents” are entitled to a special package of tax benefits. Senior returning residents are Israeli individuals who have lived abroad for at least 10 years continuously.

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Someone who returned to Israel in the years 2007-2009 could become a senior returning resident after living abroad for only five years.

The most notable benefit is a 10-year Israeli tax holiday (exemption) regarding all foreign-source income (including income from salary, business, pensions, investments, etc.) and capital gains, even if the foreign assets were acquired after moving to Israel. Exempt income and related assets do not need to be reported to the Israel Tax Authority for the whole 10 years.

During the 10-year tax holiday there is also immunity from anti-avoidance rules regarding “management and control,” “controlled foreign companies” and ”foreign professional companies.”

If a foreign asset is sold more than 10 years after the individual arrived in Israel, a partial exemption is granted pro rata to: (1) the period from purchase to 10 years after arrival in Israel, divided by (2) the total period of ownership of the asset.

For example, Mr. Newcomer acquired a property in New York on January 1, 2000, became a new Israeli resident on January 1, 2010, and sold the property on January 1, 2025. He will be exempt on [20 years divided by 25 years equals] 80 percent of the inflation adjusted capital gain from the property and be taxed in Israel on 20%. This is after crediting US taxes on the same deal in the same ratio.

Individuals may waive the exemption, although there are few circumstances where this option is preferable.

With regard to income derived in Israel, no exemption applies, but additional tax credit points are granted to returning residents to reduce the Israeli tax liability (see below).

If you were gone six years If an individual lived abroad for six years continuously before returning to Israel on or after January 1, 2009, that individual will be classified as a “returning resident.” Returning residents get a more limited package of tax breaks than senior returning residents.

Returning residents enjoy a five-year Israeli tax exemption regarding foreign-source, passive (nonbusiness) income from: • pension, royalties, rent, dividends and interest from assets acquired abroad that the returning resident acquired while living abroad after leaving Israel; • dividends and interest from foreign “privileged securities” (these are publicly traded securities that the returning resident acquired while living abroad after leaving Israel, managed at a banking institution), as well as publicly traded securities that the returning resident acquired out of dividends, interest or capital gains from privileged securities deposited in the same account. The account at a banking institution must not contain any deposits after the returning resident returned to reside in Israel, except for dividends, interest and capital gains. It seems such a banking institution may be in Israel or abroad.

For example, Yuval returned to Israel from the US on January 1, 2011, after residing outside Israel from 2004 through 2010. While living in the US Yuval acquired a privileged securities portfolio. In 2011, Yuval sold the shares in the privileged securities portfolio and bought bonds issued by a US corporation. In 2012, interest was paid on those bonds, and at the end of the year the bonds were sold at a profit. Based on the law, Yuval may enjoy an Israeli tax exemption on the privileged securities portfolio, including an exemption for the interest and the sale of the bonds, so long as no new deposits were made in the bank account (except the above interest and sale gain).

Returning residents also enjoy a 10-year exemption from Israeli tax on capital gains upon the sale of assets, including “privileged securities,” which they acquired abroad while living abroad. No exemption applies if the asset represents a direct or indirect right to an asset located in Israel.

After 10 years, returning residents enjoy the same partial exemption for foreign capital gains as senior returning residents, calculated pro rata to: (1) the period from purchase to 10 years after arrival in Israel, divided by (2) the total period of ownership of the asset.

A further more limited benefit is available for researchers if they are “privileged residents.”

These are individuals who first become Israeli resident in 2011-2015, or who return to reside in Israel in those years after residing outside Israel for six consecutive years.

If such a person is invited, while still a foreign resident, to live and work at a recognized Israeli academic institution or hospital, he will be exempt from Israeli tax on foreign-source royalty income received from an “application company” belonging to that institution for five years starting in the year such income is first received. Various conditions apply. In particular, the individual must enter into an agreement with the application company within two years after the end of the year in which he came to live in Israel.

With regard to income derived in Israel, no exemption applies. However, commencing in 2011, “returning residents” may receive extra credit points.

Credit points are deducted from the tax liability (not from income). Each credit point is currently worth NIS 209 per month.

A man generally receives 2.25 credit points (which reduces tax by NIS 470 per month), and a woman receives 2.75 credit points (which reduces tax by NIS 574). If a couple both work and opt for separate tax calculations, the wife will receive an extra credit point for each child under 18 years of age and half a credit point for a child born or reaching 18 in the tax year.

However, immigrants and returning residents may receive an extra three credit points in the first 18 months after their immigration, two extra credit points in the next 12 months and one extra credit point in the next 12 months. Returning residents only get these extra credit points if they previously lived abroad six years continuously and return to Israel between May 16, 2010, and September 30, 2012.

To sum up People returning to live in Israel after living abroad for at least six years may qualify for Israeli tax breaks, but advance planning is absolutely essential before they return to Israel.

As always, consult experienced tax advisors in each country at an early stage in specific cases.

leon@hcat.co Leon Harris is a certified public accountant and tax specialist at Harris Consulting & Tax Ltd.


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