Double-edged sword: Taxation and the Israeli brain drain

In recent years, we have seen various attempts by the Israel Tax Authority to minimize and even abolish these benefits.

March 2, 2019 22:48
3 minute read.
Stacks of Israeli shekel notes [Illustrative]

Stacks of Israeli shekel notes [Illustrative]. (photo credit: NIR ELIAS / REUTERS)


Dear Reader,
As you can imagine, more people are reading The Jerusalem Post than ever before. Nevertheless, traditional business models are no longer sustainable and high-quality publications, like ours, are being forced to look for new ways to keep going. Unlike many other news organizations, we have not put up a paywall. We want to keep our journalism open and accessible and be able to keep providing you with news and analysis from the frontlines of Israel, the Middle East and the Jewish World.

As one of our loyal readers, we ask you to be our partner.

For $5 a month you will receive access to the following:

  • A user experience almost completely free of ads
  • Access to our Premium Section
  • Content from the award-winning Jerusalem Report and our monthly magazine to learn Hebrew - Ivrit
  • A brand new ePaper featuring the daily newspaper as it appears in print in Israel

Help us grow and continue telling Israel’s story to the world.

Thank you,

Ronit Hasin-Hochman, CEO, Jerusalem Post Group
Yaakov Katz, Editor-in-Chief


In 2008, the “Milchan Law” was passed, whereby new immigrants and returning residents were granted a tax and reporting exemption on income from abroad for 10 years from the date of their immigration or return to Israel.

In recent years, we have seen various attempts by the Israel Tax Authority to minimize and even abolish these benefits.

While the minimization of these benefits could increase transparency and supervision, it harms those new immigrants and returning residents who are needed and lacking in our society, including doctors and hi-tech professionals who have left Israel.

There is significant economic damage resulting from the brain drain out of Israel, since the local investment, i.e., subsidizing years of education and academics, is not being realized here.

 In addition, there is a lack of experienced professionals in certain required professions in the economy. Israel is trying to make it easier for the returnees with the help of the Innovation Authority’s “National Program for Academic Restitution,” the goal of which is to help find work for them when they return to Israel.

However, the Tax Authority seems to have other intentions. Recently, in the framework of the “Reportable Positions” for 2018, they published two tax-related positions that require reporting, reducing the possibility of offsetting losses incurred for a new immigrant or returning resident during the 10-year tax-exemption period. As a result, a new immigrant or returning resident will pay more tax because they will not be able to offset certain losses that, according to a certain approach, could have been offset previously.

In addition, a recent tax ruling published by the Tax Authority determined that the taxation of employee options of new immigrants and returning residents – regular or veteran – will be based on a strict calculation, if they move to in Israel and hold employee options granted to them while working abroad.

The positions of the Israel Tax Authority do not concern only the immigrants themselves, but also the companies in which they are employed.

THERE HAS been a trend from previous years to impose tax on the activity of foreign companies, for which the new immigrant carries out business activities in Israel.

These positions may harm the motivation of international companies to employ workers in Israel, as well as the Israeli employees returning to Israel when employed by a foreign company.

It is important to note that minimization of the reporting exemption may lead to increased transparency and reporting requirements, as in the framework of the “Arrangements Law” for 2015-2016.

It was proposed to cancel the exemption from reporting for new immigrants and returning residents on assets and income derived outside of Israel. However, this attempt did not succeed and in the meantime, the exemption remains intact.

 It should be noted that an exemption from such reporting raises pressures from international associations such as the OECD, as it contradicts the global trend of cross-country transparency.

The implications of minimizing benefits under the Milchan Law have two facets. On the one hand, increased supervision and transparency of the income and assets of immigrants, returning residents and multinational companies owned and/or operated by them.

In addition, the limited case law enables those entitled to these benefits to make convenient tax calculations for mixed activity, i.e., activity carried out both in Israel and abroad, and for intangible knowledge created outside of Israel for those eligible for tax relief.

As such, the minimization of these benefits could lead those immigrants (and their capital) remaining outside Israel.

Taking into account the positions of the Tax Authority, cost-benefit considerations must be implemented in order to reduce the economic damage caused by the brain drain.

The Authority must decide which benefits will be retained and which should be amended, in order to enable transparency and supervision, without harming national objectives.

At the same time, the government and the various parties, given the upcoming elections, must act to adjust the positions of the Israel Tax Authority to its policies with respect to the struggle to bring Israeli intellect back to Israel.

Eli Alice is a CPA, partner and head of the international tax department at BDO Israel. Michael Goldberg is a CPA, and expatriate tax manager at BDO Israel. They both hold MBAs.

Join Jerusalem Post Premium Plus now for just $5 and upgrade your experience with an ads-free website and exclusive content. Click here>>

Related Content

July 21, 2019
July, 22, 2019: Ship of fools


Cookie Settings