Last March, the The Jerusalem Post reported on a joint effort by the Immigration and Finance Ministers to attract 60,000 new immigrants and returning residents to Israel with tax and other benefits. A formal draft of the bill is now being circulated for comment before being sent to the Cabinet and Knesset for approval, clarifying many aspects of the proposed legislation. The stated objectives of the bill are to: (1) facilitate aliya, (2) promote the return of "quality human capital" to Israel, and (3) encourage investors with financial means to make Israel their center of living and invest in the development of Israel's economic strength. The bill would have retroactive effect for individuals who become Israeli resident on or after January 1, 2008. Unfortunately, there are apparently no transitional measures proposed for anyone who became an Israeli resident before then. Foreign income - new olim: New olim would be exempt for 10 years after becoming resident from paying tax on virtually all types of income (and capital gains) accrued or derived outside Israel, unless they request otherwise. Therefore, under the proposals, non-Israeli investment income and capital gains, non-Israeli employment income and non-Israeli business income will all now be exempt for 10 years, even if they relate to assets acquired after taking up Israeli residence. This is a big improvement on the current exemption of 5 years for foreign dividends, interest, rent and royalties relating to assets held abroad before becoming resident; and 4 years for income of a business conducted abroad for at least 5 years before becoming resident. The exemption for capital gains is already 10 years. Nevertheless, overseas taxes on income, capital gains and inheritances will still need careful advance planning and preparation. Foreign income - "Senior Returning Residents": Under the proposals, a "Senior Returning Resident" (Toshav Hozer Vatik) would enjoy the same 10-year exemption as new residents on virtually all types of income (and capital gains) in the following cases: â€¢ If they return to reside in Israel in 2008 or 2009 after living abroad on an ongoing basis for 5 consecutive years - including at least three years after they stopped being an Israeli resident, or â€¢ If they return to reside in Israel in 2010 or later after living abroad on an ongoing basis for 10 consecutive years including at least eight years after they stopped being an Israeli resident. Those people who "stopped being an Israeli resident" after January 1, 2003, were subject to Israeli capital gains tax - "exit tax" - on their assets upon departure or upon their subsequent sale. This proposal evens things up a bit for them upon their return. Foreign passive income - other Israeli returning residents: Under the proposals, if returning residents don't qualify for the 10-year exemption, but they lived abroad at least three years on an ongoing basis after they stopped being Israeli residents, they will continue to enjoy an exemption from Israeli tax for 5 years after returning to Israel regarding investment income not derived from a business and for 10 years in the case of capital gains, unless they request otherwise. This exemption would only apply to: Dividends, interest; dividends, pension, royalties, rent and capital gains from non-Israeli assets which they acquired while living abroad after they stopped being Israeli residents; and dividend, interest and capital gains on non-Israeli assets re-invested after returning to Israel if such assets were deposited before returning to Israel in a "privileged securities portfolio" at a non-Israeli bank and if the securities are traded on a stock exchange. The portfolio may be transferred to an Israeli bank if the Tax Director so allows. This proposed exemption for re-invested income is welcome. Nevertheless, the portfolio must be held at a bank, not a broker, portfolio manager or other financial intermediary; it is unclear whether capital can also be re-invested (drafting oversight?); and the re-investment exemption does not apply to investments in private companies, untraded government bonds or real estate. It remains to be seen whether any changes will be inserted into the law, if and when enacted. Overseas companies: Under the proposals, new Israeli residents and senior returning residents would not jeopardize their 10 year exemption if they invest or operate via a foreign company. For the first 10 years after they become Israeli resident, the business of any such foreign company will not be deemed to be "controlled and managed" in Israel. Also their shareholdings and income entitlement will be ignored for the purposes of Israel's "controlled foreign corporation" (CFC) rules and "foreign professional corporation" rules. Therefore, such foreign companies should be outside the Israeli tax net for 10 years and present interesting opportunities to multinational families. Overseas pensions: Under the present law, after the 5 year exemption for pensions is over, new residents can elect not to pay more tax on overseas pensions than they would have paid in their old country of residence. The Tax Authority claims it is difficult to keep abreast of foreign tax law. Under the proposals, overseas pensions of new and returning residents would be entirely exempt for 5 - 10 years (see above). After that, they would be treated like other Israelis, and only the first NIS 7,400 per month will be exempt; the remainder will be added to other income and taxed at regular rates (up to 47%, plus National Insurance (Bituah Leumi) in some cases). The term "pension" is not defined, unfortunately. There are many types of retirement plans with many and varied terms, including withdrawal terms. "Settling-in year": Under the proposals, new immigrants and senior returning residents would be allowed to avoid being treated as Israeli residents for one year, provided they elect this by submitting a form to the Israeli Tax Authority within 90 days after arrival in Israel. This may be useful if they expect to derive capital gains on the Tel-Aviv stock exchange or from other Israeli companies in certain cases. Otherwise, it seems a pointless bureaucratic procedure. The 10-year exemption period will still run from the actual date of arrival in Israel, not after one year. Annual Tax Return Dispensation: Under the proposals, new residents and senior returning residents would not need to report exempt overseas income or overseas assets during their 10 year exemption period. "Patach" foreign currency deposits: No changes are proposed for "Patach" foreign currency deposits for at least three months at an Israeli bank. Interest is exempt for 20 years in the case of new residents, if certain procedural conditions are met. However, it is unclear whether the 5-year exemption will continue for returning residents who lived abroad for over three years. To sum up: Assuming these tax breaks will be enacted as proposed, they will put icing on the cake of existing tax benefits for new and returning residents. But there's no need to consider delaying your Aliya or return to Israel, as the proposals should apply to people arriving on or after January 1, 2008. Perhaps one day Israel will overtake Geneva, the Bahamas and London to become a tax haven of choice for many people. As always, consult experienced tax advisors in each country at an early stage in specific cases. firstname.lastname@example.org Leon Harris is an international tax partner at Ernst & Young Israel.