Your Taxes: Aliya for South Africans and others

A new bill before the Knesset aims to encourage 60,000 people to make aliya or return to Israel.

Existing tax breaks for new and returning residents allow a four-year exemption in Israel for self-employment income after five years of operations abroad; a five-year exemption in Israel for dividends, interest, rent, royalties and pension income regarding overseas assets/entitlement acquired before becoming an Israeli resident; and a 10-year exemption in Israel for capital gains regarding overseas assets acquired before becoming an Israeli resident. A new bill before the Knesset aims to encourage 60,000 people to make aliya or return to Israel by allowing them a blanket, 10-year tax exemption for all types of foreign-source income and capital gains derived personally or via a foreign-resident company. To help us understand what this means, here is a comprehensive example: Profile Solly and Sally live in Johannesburg, South Africa. They have three children under the age of 18. They live well, but they are worried about the crime on the city streets and the xenophobic violence. Their assets are "amnestized" and include: apartments in Cape Town that are rented out; a South African company that imports furniture from China; a Jersey investment company that holds shares in companies listed on the London Stock Exchange; an offshore portfolio bond (OPB). This holds US and Asian publicly traded securities that are professionally managed and attached to a life policy offered by a Luxembourg insurance company; a Picasso painting hanging in their home. In addition, Sally and the children are potential beneficiaries of a discretionary trust settled by Solly in 1990. Other potential beneficiaries are Solly's sister and her children who live in Australia. YOUR TAXES The trust owns land near Durban that is expected to be developed into a casino resort soon. This coming November, Solly, Sally and the kids intend to make aliya and live in Modi'in. Solly intends to manage the South African furniture company from Israel (three weeks each month) and in South Africa (one week each month). He also plans to sell Chinese furniture to Israeli retail stores. Next January, they expect to invest in further securities in Europe, the US and Asia. Proposed new rules Solly and Sally should check their tax position in each country. Under the proposed new rules, once their family makes aliya, they could elect a 12month "settling in" year as non-Israeli residents. But they should probably reject this option in this case. Instead, the couple should obtain a tax-clearance certificate from the South African Revenue Service (SARS) on the grounds that they are each an oleh and resident in Israel, not South Africa, according to Article 4 of the South Africa-Israel Tax Treaty. They may have to pay South African capital gains tax on their assets at a rate of 10 percent after using up their R2 million-per-person exemptions. For 10 years after taking up residence in Israel, they can expect for Israeli tax purposes: no Israeli tax on rent from the Cape Town apartments (but check the South African tax situation); no Israeli tax on the profits of the South African furniture company, even if it is controlled and managed from Israel. However, income from furniture sales effected in Israel to stores in Israel will be taxed at regular Israeli rates; no Israeli tax on the profits of the Jersey investment company, even if it is a controlled foreign corporation (CFC) under Israel's anti-offshore rules; no Israeli tax on the profits of the offshore portfolio bond. Based on present practice, after 10 years it may be treated as a "savings plan" and income (not capital) distributed to the couple will be taxed at a rate of 20%. (Note, the same may apply to IRA plans in the US, RSPP plans in Canada, SIPP plans in the UK and "Super" funds in Australia); no Israeli tax on the Picasso painting. After 10 years, it will still be an exempt chattel of the couple; no Israeli tax on income derived by the trust. After 10 years, separate regulations may exempt trust income attributed or distributed to the Australian beneficiaries, but numerous conditions apply and the trustee will generally have to pay Israeli tax on other trust income at rates ranging from 10% to 44% (legislated rate commencing in 2010). Capital gains tax aspects must also be checked out. In practice, it is advisable for the trustees to consider re-structuring the trust before Solly and Sally move to Israel. The income and gains from the planned new investments in Europe, the US and Asia next January will also be exempt in Israel, but advice should be obtained, especially regarding how to minimize capital gains tax and inheritance/estate tax exposure in the countries concerned - perhaps by investing via the Jersey investment company. Concluding remarks If the new tax breaks will be enacted as proposed, they will put icing on the cake of existing tax benefits for new and returning residents. But don't delay your aliya or return to Israel, as the proposals should apply to people arriving on or after January 1, 2008. And who knows, Israel may become the tax haven of choice for many people - move over London, Geneva and the Bahamas! As always, consult experienced advisors in each country at an early stage in specific cases. [email protected] Leon Harris is an international tax partner at Ernst & Young Israel.