Immigrating to Israel – keeping it a desirable goal

September 21, 2019 21:07
2 minute read.
Approximately 170,000 Americans live in Israel.

Approximately 170,000 Americans live in Israel. In total, more than one million U.S. citizens and green card holders – who both live overseas and own more than 10% of a foreign corporation – faced the prospect of paying the tax.. (photo credit: REUTERS)

Most people who have been contemplating making aliyah are probably familiar with the special tax treatment Israel offers to new immigrants.

The amendment to the Israeli Tax Ordinance, which was introduced in the year 2008 and has been applicable since January 2007, applies to new immigrants and senior returning residents (those Israelis with 10 consecutive years of being foreign residents). It includes significant tax benefits under the presumption that it will promote high net worth individuals to move capital into Israel and move themselves here.

Under the tax treatment, a new immigrant is fully exempt from Israeli income tax and capital gains tax on any income that was derived outside of Israel for a duration of 10 years, commencing on the day they arrive to Israel. Moreover, the treatment exempts any such person from reporting any foreign income or assets for the same duration.

The exemption covers all types of income, both passive and active, and includes, inter alia, dividend income paid by a foreign company, interest income and royalties paid by a foreign payer, rental income and capital gains from real estate located abroad, capital gains from the sale of shares of a foreign company, income generated from a business activity conducted abroad, and income received for employment and/or services conducted abroad.

However, there has been increasing disapproval of the special tax treatment, mainly by heads of the Israel Tax Authority (ITA). These critics suggest that it is not clear whether the special tax treatment has in fact brought about increased transfer of capital and business from abroad into Israel, or an increase in immigration by high net worth individuals.

Greater discontent has been expressed with regard to the reporting exemption, which in the view of the authorities, is incompatible with recent changes made by the OECD, Israel among them, with regard to transparency and share and transfer of financial information between countries in order to combat tax evasion.

Just a few days ago, the deputy director general of the ITA revealed that it has recently formed a special “reform committee” that is currently re-examining the special tax treatment. It seems very probable that any such reform would repeal the reporting exemption, and even may reduce some of the tax benefits that are now in place.

I should also be noted that the tax authorities are about to issue a proposed amendment to the Tax Ordinance and specifically to the residency test provisions. This would provide for a clearer test based not only on a center-of-life test, but also based on the number of days spent in Israel in a tax year. The new test may require reexamining existing structures with those who spend time in Israel but claim their center of life is elsewhere.    

The elections we just experienced will hopefully determine, among other things, who will be in charge of the Finance Ministry, and whether the heads of the tax authorities would be able to persuade that person to make amendments to the Tax Ordinance, which would result in a change for the worse in the existing tax treatment toward immigrants.

The author is a partner and head of the tax and financial regulation department of ZAG-SW Law Offices.

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