Your Tax in '06: Tax benefits for new and returning residents
A resident is someone whose center of living is in Israel. This is assumed to be the case if a person is present 183 days in a tax year or 425 days over the last 3 years including 30 days in the most recent year.
By LEON HARRIStaxes good 88(photo credit: )
To help new and returning residents "acclimatize" to life in the promised land, certain tax benefits are granted for limited periods after becoming Israeli residents. Israeli customs and land acquisition tax benefits also exist but they are not covered in this article.
The benefits are not what they used to be. You may remember the Jewish Agency and other bodies promising you a 30-year tax holiday if you migrate to Israel. That was a few years ago, and in 2003 the 30 years shrunk considerably. On January 1, 2003, Israeli residents generally became taxable on their worldwide income.
A resident is someone whose center of living is in Israel. This is assumed to be the case if a person is present 183 days in a tax year (calendar year) or 425 days over the last three years including 30 days in the most recent year. Residency is not the same as citizenship. If you are a US citizen residing in Israel, you may be taxable in both countries on your worldwide income - you should make sure to check your residency and foreign tax credit position under the tax laws of each country and the US-Israel tax treaty - double tax is avoidable.
For new immigrants and returning residents, this is now the tax deal. There are seven types of exemption - partial or full - worth checking out. Here is a summary of them - further advice should be sought in specific cases.
First exemption - certain types of income: An income tax exemption is granted for the first five years after becoming an Israeli resident, for income from dividends, interest, rent, royalties or pension income. But there is a big but. This exemption only applies to income from overseas assets held prior to becoming a resident.
If you invest in a company even one day after taking up residency in Israel, income on that investment - dividends, interest, rent, royalties and capital gains will be fully taxable. The tax rate for investment income dropped to 20% on January 1, 2006 for most types of securities investment income (not rent) for individuals owning under 10% in the invested entity.
This exemption is also available to Israelis who reside abroad for a continuous period of three years and then resume Israeli residency.
Second exemption: Exemption is also granted for the first 10 years after becoming an Israeli resident for capital gains derived from overseas assets held prior to becoming a resident.
Third: Partial capital gain exemption. If an overseas asset held before taking up Israeli residency is sold more than 10 years after becoming an Israel resident, a pro-rata exemption will apply to the gain according to special formula based on the period of ownership. The portion of asset ownership ending 10 years after taking up Israeli residency is exempted. This can result in a big tax saving - sometimes.
For example, suppose you bought a house abroad on March 1, 1966; took up Israeli residency March 1, 1986; and sell the house March 1, 2006. The ownership period was 40 years. The exempt period ended 10 years after arrival in Israel, namely March 1, 1996 (first 30 years of house ownership). Therefore, the exempt portion of the capital gain is 30/40ths.The other 10/40ths of the capital gain is taxable at various rates - up to 49% for the pre-January 1, 2003 portion of the gain, 20% for the post January 1, 2003 portion.
Oh, by the way, the gain has to be calculated in inflation-adjusted shekels, not foreign currency and additional special rules help deal with the inflationary portion of the capital gain. Finally, if the house sale is also taxable abroad, claim a foreign tax credit. An immigrant clearly needs to be a wizard mathematician to get on in this country.
Fourth exemption: Israeli securities. Another exemption from Israeli capital gains tax now generally applies to foreign individual investors in Israeli securities (stocks, shares, bonds) who have been resident for at least 10 years preceding the date of acquisition of the investment in a country that has a tax treaty with Israel (e.g. US, UK, France, Canada, South Africa, but NOT Australia or New Zealand). This applies if they acquire their investment between July 1, 2005 and the end of 2008 and notify the Israeli Tax Authority of their acquisition within 30 days on a special form (not yet published).
So far so good. Even better is that this exemption will also apply for 10 years to foreign residents who take up Israeli residency after acquiring their investment. Moreover, the Israeli securities can be in a public or private company.
Here's a tip. If you are thinking of moving to Israel (from a treaty country) and starting up a company in Israel - start it up before you take up residency and notify the Israeli Tax Authority within 30 days. If the company is successful, you have 10 years after taking up residency to sell its shares and enjoy the aforementioned capital gains tax exemption.
Fifth exemption: A separate exemption is granted for the first four years after becoming an Israeli resident, for income from any business you conducted abroad in the five years prior to first becoming resident. But, doubts creep in if the business abroad was conducted via a company, such as a US S-Corporation or LLC. They may be disregarded "pass through" entities under US tax law, but this doesn't necessarily hold for Israeli tax law purposes - the Israeli Tax Authority have yet to clarify this aspect for us.
Sixth exemption: New residents who open a three month foreign currency "PATACH" deposit account at an Israeli bank are generally exempt from Israeli tax on the interest income from this for 20 years after taking up Israeli residency. Returning residents, after living abroad over three years on an ongoing basis, enjoy this exemption for five years after taking up Israeli residency. However, various conditions must be met. In particular, the deposit account must not be part of any business nor used as collateral for any loan. And the Israeli bank must be notified upon receipt of any remittances from abroad.
Seventh motley set of (partial) exemptions: New residents enjoy a one time 0.5% acquisition tax rate up to a prescribed amount (instead of up to 5%) when acquiring a home in Israel, within seven years after taking up residency. Make sure your lawyer checks this out when registering the deal at the Land Registry (Tabu). And other partial exemptions apply upon the purchase of a car and other household items - check these out with the car dealer, a customs office or your Immigrants' Society (AACI for Americans and Canadians in Israel and similar bodies for immigrants from other countries. Last but least, new residents enjoy increased personal "credit points" that will slightly reduce their tax liability for 42 months after taking up residency. Nothing to write home about, but these benefits generally do not apply or apply less extensively to foreign residents.
leon.harris@il.ey.com
The writer is an International Tax Partner at Ernst & Young Israel.
