On May 25, a ministerial legislative committee approved the Aliya Tax Reform bill, according to a joint announcement by the Finance and Immigration Absorption ministries. The bill still has to be debated and passed by the Knesset. The bill 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, the announcement contains some examples, including the following: MICHAEL THE MIGRANT: Profile: Until now, Michael, 70, has always lived in Brooklyn. In 2008, Michael and his family decide to make aliya and become residents of Israel. Michael is a successful lawyer who owns a company resident in the Bahamas that provides consulting services to Canadian and United States residents. Michael's assets include, inter alia, an apartment building in Los Angeles, 20 percent of a goods transportation company and a patent that he licensed to the Microplasma Corporation for an annual payment of $1 million. Proposed rules: Under the bill, Michael and his family generally will be considered to be new Israeli residents in 2008. However, they may elect at their local Israeli tax assessing officer to enjoy a "settling-in year," in which they will not be regarded as Israeli residents for tax purposes, to enable them to make up their minds about immigrating to Israel. In that year, and the following nine years, Michael will be exempt from Israeli tax on salary received from the consulting company, in respect of work done outside Israel. Also, Michael will be exempt from Israeli tax on income, derived outside Israel, from rent, dividends, capital gains, interest and royalties from the Microplasma Corporation. Furthermore, under the proposals, the provisions of the Israeli Income Tax Ordinance regarding a "foreign professional company" will not apply to the Cayman consulting company; therefore, Michael's share of its profits will not be deemed to be derived (i.e. taxable) in Israel. In addition, in the 10-year exemption period, the foreign resident companies owned by Michael will not be deemed to be "controlled and managed" (i.e. resident and taxable) in Israel. Also, during the exemption period, Michael will not be subject to reporting requirements for Israeli tax purposes on income derived outside of Israel that is exempted, according to the proposals. Nevertheless, Michael will be subject to Israeli tax at regular rates on income derived from investments and activity performed in Israel. Our comments: The 10-year proposed Israeli tax exemption for non-Israeli source income is welcome. Let's hope the Knesset enacts these proposals soon. Israeli source income will remain taxable in Israel. In addition, Michael will still need to pay US taxes on his worldwide income if he is a US citizen or green card holder. Foreign tax credit rules in the two countries tax laws; the US-Israel tax treaty will need to be checked out. Similar considerations apply to immigrants, investments and activities linked to other countries - Canada, UK, South Africa, France, Australia, etc. Furthermore, the example mentions that Michael is aged 70 but is silent about his pension arrangements. The proposed bill indicates that foreign pension income will be exempt for 10 years and then partly exempt in Israel. However, it unclear what the term "pension" means (IRA in the US? RSPP in Canada? SIPP in the UK? Super account in Australia?). The "settling-in year" election may help save Israeli tax if Michael expects to sell Israeli investments in that year. Note that the interaction between foreign estate/inheritance taxes and Israeli capital gains tax on inherited or gifted overseas assets remains problematic. Michael and others coming to Israel should obtain appropriate advice on all these points. ALON AND ALONA - RETURNING ISRAELI CITIZENS: Profile: In this example, Alon is a software engineer who completed his studies at the Technion in 1998. He then worked for an Israeli company engaged in developing software with applications for the business sector. In 2002, Alon resigned from his work in Israel and moved, together with his girlfriend, Alona, to reside in the US. There, he started working for a US corporation engaged in a similar field. While living abroad, Alon married Alona. The couple saved money from the salaries they earned in the US and invested in various classes of assets, including savings plans, publicly-traded securities and investment in a private US corporation engaged in development of a patent for the purification of salt water. In 2008 the couple decides to return to Israel. Proposed rules: According to the proposed bill, upon their return to Israel, the couple will generally be classified as "senior returning residents" and treated similarly to immigrants for Israeli tax purposes," if they were still non-Israeli residents (for five continuous years) as of January 1, 2008. However, they may elect at their local Israeli tax assessing officer to enjoy a "settling-in year," in which they will not be regarded Israeli residents for tax purposes, to enable them to make up their minds about returning to Israel. In that year, and the following nine years, the couple will be exempt from Israeli tax on income from interest, dividends and capital gains accruing on non-Israeli assets they own. Also, in the event that the couple sells their investment in the US corporation in that 10-year exemption period (i.e. including the settling-in year), they will be exempt from Israeli tax. Our comments: Basically similar to our comments on Michael's case. Note also that if they receive stock options from the US corporation for work done in the US, there should be no Israeli tax on any resulting gain realized in the 10-year exemption period. This should resolve some of the problems that returning residents sometimes have due to differing tax treatment in the two countries. To sum up: New and returning residents should get a better deal once the proposals are enacted, but it won't be perfect. As always, consult experienced advisors in each country at an early stage in specific cases. firstname.lastname@example.org email@example.com Leon Harris is an international tax partner at Ernst & Young Israel (accountants). Steven Slom is a special counsel to Haim Samet, Steinmetz, Haring & Co. (advocates).