Your Tax in '06: Get a plan

When it comes to investing, your goal is to maximize the after-tax returns while deducting any losses and interest on leveraged investments.

taxes 2 88 (photo credit: )
taxes 2 88
(photo credit: )
This article is the first in a series on taxation for individuals with financial investments who live in Israel or plan to do so. The comments are general and professional advisors should be consulted in each country concerned. When I was young, my parents took me to the theater more than once to see the play "Fiddler on the Roof." In a wedding scene, some guests in convivial spirits ask the revered Rabbi if there is a blessing for the Tsar of Russia. "Why sure," he replies, "May the Lord bless and keep the Tsar ... far away from us!" Some people occasionally apply the same principle to tax matters - they keep all tax matters far away and out of mind indefinitely. This is the head-in-the-sand approach and it offers little comfort if (a) you get caught or (b) you file your tax returns but pay more tax than is strictly necessary. When it comes to investing, your goal is to maximize the after-tax returns while deducting any losses and interest on leveraged investments. And, since you cannot take your wealth with you into the next world, another long-term goal is to transfer - when you're ready - as much as possible of your investments and other wealth to your family or other designated persons. This is because there are taxes on death and on gifts to contend with in a number of countries - the US, Canada, the UK and most European countries - even if you live in Israel. And Israel now imposes capital gains tax on gifts of assets to non-residents such as your family abroad. So what is needed is a general understanding of the tax basics, a review of any legitimate tax planning techniques and advice from competent tax advisors in each country. You can judge whether they're competent if they are qualified accountants or lawyers with worldly experience (in a tax sense) and are prepared to work in coordination with your other advisors - especially when it comes to tax solutions. Nobody has a monopoly on knowledge in the modern world. It may well be advisable to hire a financial or tax advisor to coordinate your financial affairs. The remarks in this column are general and subject to the specific comments of your own tax and other advisors. They are also subject to change. Let's start with some basics. Who is taxable and on what? Prior to the Israeli tax reform of 2003, Israeli residents were taxed under a primarily source-based system by which Israeli and foreign residents were subject to tax in Israel on Israeli source income. Therefore, foreign source passive investment income such as dividends, interest and rent was not taxable in Israel provided such income was first received abroad. Following the tax reform, an Israeli resident is now subject to tax on a personal worldwide basis of income, regardless of whether it was accrued, derived or received in Israel. By contrast, a non-Israeli resident is taxable only on Israeli source income and gains. So there is something to be said for a perpetual traveler who visits Israel and stays in a hotel or vacation home he owns in Israel without establishing Israeli residency status. Such persons used to be called "180 day commandos" but the tax reform now deems such persons to be Israeli residents and they should now consider reducing their stay in Israel below 425 days over every three year period commencing in 2001 ("140 day commandos" perhaps) - more on that later. New immigrants and returning Israeli residents enjoy certain transitional Israeli tax exemptions for five to 10 years after their arrival but only on their pre-arrival assets abroad, not subsequent investments. Most other countries apply similar rules regarding residents and non-residents of their country, but usually no transitional benefits - which other country encourages immigration? The writer is an international tax partner at Ernst & Young Israel