Ask Miriam, the tax expert

Vol XIII: My Israeli relative has asked me to become a partner in his small business, but I don't live in Israel. What taxes will I owe?

tax88 (photo credit: )
(photo credit: )
For Red Tape resources click here. Miriam Vilner is a licenced CPA (Isr.), a member of the Institute for Certified Public Accountants in Israel and a qualified Arbitrator registered with the Ministry of Justice. She holds degrees from London University and the Weizman Institute Send us your questions >> * * * Vol XIII Q: Just seeing your column now has given me much reason for thought. I've a relative in Israel who's asked me to become a partner in a small business he has opened in Israel. A financial backer, mainly. I don't expect to be living in Israel on any permanent basis, but perhaps a combined 2-3 month vacation-business visit, every so often, perhaps not even yearly. Any work I might do there would be nominal and probably not salaried or if salaried would not accumulate to much. I'm an Israeli citizen as I became an Oleh Chadash for a few years many years ago, but haven't been there for about 30 years. I am well over retirement age. What is my Israel tax position with my assets outside Israel? Because if I'm going to be grabbed by the tax authorities, I 'll have to forget the whole thing. A: Thank you for your e-mail. I'm afraid I cannot be of much help as you yourself do not seem to be quite clear what your problems are. 1. Tax liability in Israel depends only on the decision of the authorities as to whether you are RESIDENT in Israel. There are no hard and fast rules - only indications of which the number of days spent in the country a year is on. They may examine where the center of your life is such as : do you own a home, bank account, car and have family in Israel? If they decide that the center of your life is in Israel, then your assets abroad are liable for tax here under the restrictions of the mutual agreement against double taxation between Canada and Israel. 2. Whether you were on an Oleh Hadash is only relevant for the Customs authority relating to concessions on cars and household goods, it doesn't interest the Israeli Tax Authority. 3. Another question is whether you are investing in this business, in which case you may receive concessions for foreign investors. 4. Your tax liability here will depend on the form of the business to be set up. Is it to be a Company - in which case you will have to pay tax on dividends or any salary you receive, even if you are not resident. Is it a partnership from which you draw an income? In which case you MAY not be liable for tax, although your partner may be obliged to deduct at source. Is your partner a self-employed paying you in some other form? You need professional advice and a clearer picture before you take any major decisions. Good Luck Miriam * * * Vol XII I thank Mr. David Garcia for his questions, which I think will be of interest to many readers: My wife and I made aliya 5 months ago from London. We have money in our bank account in London. This money is partly savings and partly money that we earn every month from rent from our apartment in London. Q1: Am I correct in understanding that I am exempt from paying tax on this income here in Israel as an Oleh Chadash for the first 5 years? A1: There is indeed a five year tax exemption on unearned income from the date you first became a resident. This includes rental income. The source of such income must be assets held outside of Israel both prior to and after aliya. Q2: Does this exemption include Bituach Leumi? A2: Bituah Leumi depends on your financial status, your age and other sources of income. There is no Bituach Leumi on interest on savings. However, if your income from rentals exceeds your "active income" from business, salary or pension, it will be liable for Bituach Leumi. A new immigrant is exempt from Bituach Leumi for the first year after making aliya and has certain advantages for health and disability insurance. None of these apply to a returning resident. Q3: If I transfer that money from my London account into my Israeli account (via a money transfer company from London or via my Bank) will I have to pay any tax on that money now or later or not at all? A3: I cannot give you a definite answer since it depends what you do with the money (see A1). This should be discussed fully - not just by e-mail. For instance: interest on income on Israeli foreign currency deposits remain tax free for the first 20 years after aliya. There are, however, many restrictions to this law and a lot of paperwork is involved. There are also tax exemptions on Shekel savings plans for all residents over retirement age. Interest and dividends on foreign securities held in Israel, would be tax even within the five years. Q4: I would also be very grateful if you could advise me of the best way of transferring this money into my Israeli account with minimal charges and taxes. Is it best to do it via cash or transferring it via the Bank/Transfer Organisation? A4: This is not a tax query and I do not have much experience since I have little money abroad. There is one golden rule of Israeli life - for any financial transaction, the banks are always the most expensive. Avoid them as much as you can. I use debit card withdrawals, so do my family but all I transfer is a very small National Insurance pension. With cash, you can go either to the Post Office bank (much cheaper) or to a recognised Money Exchange, these do not charge any conversion fee as the Banks do, they live from the buying/selling difference. Most are reputable and their transactions are registered with the Bank of Israel database. I have available a booklet on the (now not so) new Tax Reform which outlines the various tax rates and exemptions for 120 NIS or $25. Miriam Vilner M.Sc., C.P.A. (Isr.) * * * Vol XI Q: My question is regarding tax rights for olim: I made aliya in 1997 and went to the army for 2 1/2 years. I left Israel in 2000 and came back in 2005. I thought that the tax rights were frozen for only up to 3 years when you're abroad - but I spoke to a guy from the tax authority today who told me that the tax rights are definitely frozen no matter how long you're overseas. According to my calculation I may have had 2 months of tax rights left when I returned - he thinks I have 2 years left. Does that sound right? A: Unfortunately someone has been misleading you. Your tax privileges start from the date of your FIRST aliya. They are frozen for periods of army service and studies in an Israeli school of advanced studies, but certainly not for periods you were abroad. Sorry. * * * Vol X Q: I lived abroad for 5 years but was recognized by bituach leumi as not being resident in Israel during this entire period. I had to apply for recognition as a resident in Israel again after I returned to Israel after my 5-year absence. The tax authority told me that it is possible that I need to declare my income from abroad (from working abroad) because Israelis are now taxed on their global assets. I do not understand why this should be the case if I was living permanently abroad and wasn't even resident in Israel. Would this mean that an Israeli who makes yerida to the states and lives and works there for 20 years would owe taxes to Israel if they ever returned for all that time??? Thanks! A: There are specific tax benefits for returning residents, too complicated to detail here. Re: Income abroad. It depends what you were doing, who your employer was and what your status was before you left. If you were an Israeli resident and worked for an Israeli employer, then you are liable for tax with recognition of certain expenses. If you worked at the same trade or profession that you followed previously in Israel, then officially, according to paragraph 5 of the Income Tax Ordinances, you are liable for tax in Israel. I have available a booklet which details the privileges of a returning resident which might interest you. It costs 120 NIS. * * * Vol XI Q: Do the new tax laws require me to declare - and will I then be taxed on - my assets in the USA, as a dual citizen (US and Israeli) living in Israel the past 3 years? Thanks in advance. A: Hi Sheila, Thank you for your e-mail. Yes. I'm afraid that as you are a resident of Israel you are required to declare your income from assetts abroad. The type of declaration would depend on the income you receive abroad. A shortened form might be enough. In addition, any tax paid abroad would be deducted and since 2006 the tax rates in both countries are supposed to be identical (from assets). If you give me more information, I would be able to assess the type of declaration required and prepare it for you. I give consultations - the first half hour is free. Vol X Q: We have just purchased a second apartment and the "Mas Rechisha" on it is six times the amount that we paid on our first apartment (same size.) Why? Would this second tax go down if we sold the first apartment? Within what time frame? Do we then get a refund or should we wait to pay the tax until after we sell the first apartment - the kablan of the second apartment doesn't want to give us the key until we pay the tax. A: In my opinion, it would be foolish to try and solve this on your own - you need a professional lawyer or CPA to help you. CPAs have recently been granted the right to represent customer at Mas Rechush, but I must (reluctantly) say that a specialised lawyer would have more experience in representation. My office works in conjunction with the Law Offices of Mr. Nissan Sharifi in Netanya, a specialist on Property Law and who helped me give you the following advice:
  • Mas Rechisha is not dependant on the size of the apartment but on its price. [I can do calculations for you to check whether the sum demanded is correct, but not without a lot more information and not within the scope of this column. I can be reached at (03) 534 3727 to fix a meeting.]
  • You have two years to sell your first apartment (recently extended from 18 months).
  • You can get your money returned if you sell within this period. My office can help you fill out the relevant forms.
  • The amount of Mas Rechisha is also dependant on whether you have new immigrant status.
  • When deciding when to sell your first apartment, check out if you are liable for Mas Shevach. This might be a factor in deciding when to sell. * * * Vol IX Q: I'm looking at doing IT consulting here, for local customers. I understand that here I need to declare myself as an atzmai with Mas Hahnasa. I'm not sure if this will be a long term direction for me. What are my options for the short and long term, and what is the significance of being an atzmai if I then get a regular job? A: As soon as you have your first customer as an atzmai, you must register with all the relevant authorities. First and foremost Mas Erech Musaf, so that you can give out heshboniot (receipts) and then also the Income Tax and Bituach Leumi. If you change your mind and become an employee and have no further dealings as an atzmai, you may close the files. Under certain circumstances, you can claim exemption from paying Bituach Leumi and register with Mas Erech Musaf as an "Osek Patur." If your status changes you have to reregister. You will be obliged to report, either independently, or using the services of a professional, every two months to the Income Tax regarding the other two authorities, it depends on your status. * * * Vol VIII Q: As an oleh, I need to transfer my savings in foreign currency into an Israeli bank account. Is there any taxation related to this operation? A: No, of course not, the tax authorities are too clever for that! Q: Should I convert my savings in foreign currency to Israeli shekels? The same question applies if I sell my home abroad and want to transfer the money to purchase a home in Israel. A: No. No. No. You will recive some interest on your foreign currency account and the following tax exemption would not apply if you converted the currency: I quote from my booklet on the Tax reform, which may be ordered for NIS 120NIS ($25). 1.1 Interest on income on Israeli foreign currency deposits remain tax-free for the first 20 years after aliya. There are, however, many restrictions to this law and a special declaration must be completed for the tax authorities and the bank. It is important that the bank holds the required forms. 1.2 There is a five-year tax exemption on unearned income from the date of becoming resident. This includes rental income. The source of such income must be assets held outside of Israel both prior to and after aliya. 1.3 The five year exemption applies also to pensions. 1.4 Capital Gains. Sale of assets held at the date of becoming resident in Israel and sold within the first ten years of arrival, are exempt from capital gains tax. After 10 years the capital gains are liable for tax on a proportional basis. This law applies also to houses sold after becoming resident. You should also be aware that even if you are an oleh, you may still hold a bank account abroad, and bank charges in Israel are horrendous. Personally, I would advise transferring as little as possible. You will be hit with charges which you never knew existed and had never heard of abroad. * * * Vol VII Dear Readers, Today's column is devoted to advice (not tax) from a (very) old immigrant to those recently arrived and reading Cafe Oleh. Q: Does the kupat holim (health funds) provide full coverage or is it sensible to take out further coverage? A: No kupat holim provides full coverage, even taking into account the extra "Maccabi Magen" or "Mushlam" of the general kupat holim. For Jerusalemites, I would advise looking into "Sharap" for the Hadassa hospitals. This insures you for private consultations and surgery. Not for private nursing or a private room. May we not need them, but it is a fact that Hadassa Ein Kerem has the best doctors in the Middle East, whatever the conditions in the hospital may be. It is also important to have insurance if you want to be treated promptly by a hospital. They can sometimes drag their feet when treating non-paying (or insured patients). My husband waited seven months for an operation until the insurance agreed to cover the costs (the reason they didn't do so immediately was not their fault and due to my inexperience). It sounds dramatic, but he might not be alive today if we had to rely on the hospital without insurance. The two oldest established medical insurances are Shiloah-Harel and Dikla. I advise consulting an independent insurance consultant - as opposed to an agent, and to shop around. Q: I need glasses, is it cheaper to order them from the Kupat Holim. I have "Maccabi Magen" insurance. A: No. Shop around. You can get the testing done by any eye doctor in the Kupa or their eye-clinic such as in Ramat Aviv, but their lenses and glasses are expensive. General note to beware: According to the statistical guidelines published by the Economic branch of the Israeli income tax, published by Ronen press - the mark-up of opticians on contact lenses is 70-90%! * * * Vol VI Q: I will be doing work for a company in the UK and earning a salary in the UK. What tax will I owe on this income in Israel? A: I am afraid you are liable for tax in Israel as is any other resident. Tax deducted abroad will be credited against the tax charged in Israel. Q: Some countries have international agreements where they exchange information on taxable income with each other. With what countries does Israel have this kind of agreement? A: I don't know anything about exchange of information between countries. Israel has treaties with several countries to prevent double taxation, the list is too long to detail, but does include Canada. Exchange of information is not my field, neither do I think it can be defined. Information exchange is not a static process and increases with technology. Where personal privacy policies are overidden by the obligation to exchange information between authorities - I don't know. I have read in the papers that Israelis and US citizens who live in one of the countries, but claim non-residency, are liable to scrutiny. Sorry I can't help you more. Q: As a new oleh who is a physical therapist, one has to convert one's licence in Israel. A current registration from abroad is required. If one wasn't working abroad before making aliya, such that one had to apply for current registration (for a fee) abroad, is that fee tax deductable in Israel once one commences work in Israel and if so, how does one claim the deduction? A: Yes the fee connected with your licence is deductible, even if you are not self-employed. The only way to receive the tax rebate is to file a yearly tax return. Our fees for such a report are very low compared to usual fee charged. If you can let me have more details, I will advise you as to whether it is worth your while to claim. I need to know how much the fee was, in what year it was paid and what was your status in Israel during the year it was paid? Employee or self-employed? Approximately how much tax did you pay in the year the fee was paid? By the way, are you getting the tax rebates due to a new immigrant? Q: I am a citizen of St. Kitts. If I live in Israel as a Permanent Resident, but do not take up citizenship, am I required to pay taxes on income earned abroad (passive or active) if it is not taxable in St. Kitts? A: Any Israeli resident is liable for tax in Israel both passive and active income. The status of citizenship is not relevant. In addition, I am not that well-informed but I doubt if Israel has a mutual tax agreement with St. Kitts. * * * Vol V Q: If I receive dividends, rental income or interest on investments from abroad, where am I liable for tax? A: You will be exempt from tax in Israel for the first five years after making aliya. If you made aliya between January 1, 1993 and January 1, 1999 you would have been exempt for the year 2003. For anyone in this category, who paid tax in Israel for the year 2003, I advise filing a tax return. Those who made aliya between January 1, 2000 and January 1, 2003 will be exempt for five years from their date of aliya. Q: What about income from pensions? A: The same rule applies to pensions accruing from years of work abroad. In addition, those that did not claim tax exemption form their pensions will receive a 35% reduction on the total pension, before tax is calculated Q: I have a foreign currency account in Israel, what tax benefits do I receive? A: Interest accruing from a foreign currency deposit account in an Israeli financial institution is exempt for 20 years, under certain restrictions. This exemption does not apply to a returning resident. Q: I have a business abroad. Am I liable for tax in Israel.? A: You are exempt from tax in Israel for four years from making aliya, provided the business existed for five years before you made aliya and remains located abroad. Q: What happens if I sell my business abroad? A: You will be exempt from Capital Gains tax for 10 years from making aliya, provided you held the asset before aliya. If you do become liable for tax, it will be calculated taking into account the real and inflationary components of the Capital Gain. This applies also to a returning resident. Q: Are IRAs which are exempt from tax in the US liable for tax in Israel? A: This is a really difficult question. In fact I don't believe the Income Tax ordinance has a definite answer to the question. I will try to explain: Social Security and pensions (old age) paid by foreign Governments are not liable for tax in Israel. If you receive a pension accruing from years that you worked abroad, in principle it is liable for tax in Israel, subject to the reductions and exemptions I outlined in the first question. If the IRA is taxable in the US, then, in principle, it is taxable here but, according to Para. 132 and 9A of the Income Tax Ordinance, you cannot be taxed here at a higher rate on a pension than you would be taxed abroad. This privilege does not apply to returning residents, unless they left the country as children. It is not limited to a specific number of years from making aliya and holds for a lifetime. It also applies to "old immigrants," provided there are regular payments accruing from years of work abroad. I usually advise my clients to pay the tax on their pensions abroad, as the tax rates are lower and you cannot be charged any further sums, however, it might be wise to consider each individual case, since you would be foregoing the five year exemption benefit in Israel. An internal Income Tax circular (17/2002) also deals with the case of a tax exempt IRA, whether exempt according to internal regulations abroad as in the US, or according to a tax treaty, then, although, on the strength of clause 132 and 9A you cannot be charged a higher rate here than in the States, the pension is liable for tax in Israel. This is not "law" nor is there an ordinance that deals with this case, I am quoting an internal circular. It is possible that it would not hold up under litigation since there is now an absurd situation: If you pay one cent tax in the States you are exempt from further tax in Israel, but if you pay zero, you are liable here, subject to exemptions and reductions outlined above. I have available a booklet on the (now not so) new Tax Reform which outlines the various tax rates and exemptions for 120 NIS or $25. * * * Vol IV Q: My wife and I are making aliya in a couple of years. My sole income is Social Security Disability and NY State Workmen's compensation. If I keep my US accounts open and open a Shekel account in an Israeli bank, is my income taxable in Israel even though it is not taxable in the US? A: No. Income cannot be taxed at a higher rate in Israel than it is abroad. Income exempt abroad is also exempt here. To date this includes Social Security although I believe it is not strictly considered exempt in the US. Q: Are recent olim (here fewer than five years), who consequently have exemptions on their foreign passive income, required to file returns, even if no tax will be levied? A: In theory, every resident is required to file a tax return. In practise only those with high income as employees or those who have opened a file with Mas Hachnasa ( Income Tax) are, in practice, obliged to do so. There is absolutely no reason for you to open a file with Mas Hachnasa at this stage and, therefore, you are only obliged to report when your income is taxable in Israel or if you get a letter in the mail asking you to do so. Q: What are the tax and legal ramifications of a US resident who is part owner within an Israel-based company? Where do you pay taxes, etc? A: Even before the Tax Reform, a foreign resident was liable for tax in Israel on property held here. An Israeli Company will pay Company Tax here. Salaries you receive or dividends are accrued in Israel and always have been liable for tax here. Q: I am an immigrant and would like to know, if I can import a car - my car for many years abroard - without being forced to go back to Germany, where I naturally paid full taxes on my car. I mean to avoid paying taxes again, possibly I would have to return to Germany in case of high taxes here, I might not feel welcome in Israel. After all, you see, I might be forced out due to the Israeli costums requirements. Will I be forced to leave you think? A: My expertise is Income Tax, National Insurance and VAT, also Property Tax, but not Customs Duty. However, I do know that you cannot, by law, import your own, old car from abroad, tax free here. Taxes paid abroad are not relevant (and much lower than here). Sorry but this is the law. Don't give up so easilly, after all hundreds of thousands, if not millions of Israelis pay full taxes on cars and still stay in the country. Receiving a tax-free car is a priviledge and like all privileges, has its limitations (I must admit that I don't see the logic either, but this is the law). You might, however, be pleasantly surprised if you enquired exactly how much you would be required to pay if you imported your own car. I suggest that you go to the Customs Authority with full details of your car and request an estimate. There you could ask a Customs Agent to enquire and help you import your car. They are experienced in bargaining over these matters. Q: You mentioned in one of your answers that absense from Israel for 181 days a year does not automatically "de-resident" a person. Does presence in Israel for 183 days during the year automatically make a person "resident" for tax purposes without satisfying any other conditions? Are the arrival and departure days counted as full days in Israel? A: As I wrote, days in Israel is not the only criterion for "residency." The number 183 has little consequence. Should your case ever be considered by the Income Tax Authority, which is extremely unlikely, the auditor would take a lot of other factors into consideration such as bank accounts, car and home ownership family here or abroad. There are no hard and fast rules. Q: I got a strange bill in my mailbox - a television tax. What is this and is there any way I can get out of paying? I already pay the cable company a monthly fee. A: No, I'm afraid not. There is a yearly television fee (it's not called "tax") for the basic Israel broadcasting services. CableTV is a private enterprise, a luxury one chooses to pay for or not. The television fee goes to the broadcasting services (government) and applies to all TV owners. Q: I understand that if a person is receiving income from the US, the income tax that is paid in Israel, one subtracts what one pays in the us and then pays the difference in Israel. The question is what about things which are tax free in the us like an IRA. Is this then also taxed in Israel? A: Yes, tax deducted abroad is credited when the tax liability is calculated in Israel. Social Security is not liable for tax in Israel. I did not know that IRAs are tax-exempt in the USA. If your IRA. is taxable in the US then, in principle, it is taxable here but:
  • You would have a five year exemption as a new immigrant.
  • You cannot be taxed here at a higher rate on a pension than you would be abroad. I usually advise my customers to pay the tax on their pensions abroad as the tax rates are lower and you cannot be charged any further sums, however, it might not be wise since you would be foregoing the five year exemption here. If you were my client, I would claim exemption on a tax exempt IRA on the strenghth of the same clause that says you cannot be charged a higher rate here than in the States. The claim may be accepted and it may not, in which case it might go for adjudication. It would probably depend on why the IRA is tax-exempt, since the basic Israeli law taxes pensions received on the strength of the years you have been an employee and only pensions (old age) paid by the Government are exempt. * * * Vol III Q: I am employed in hi-tech in Israel and I have received Options as part of my reimbursement from my employers. What does this mean? A: Options for their staff is a common form of reimbursement of employees, particularly in the hi-tech industry. These Options allow the employees to purchase shares of the Company at a pre-determined price. As soon as the employee purchases the shares, he is at liberty to sell them immediately and to profit from the difference between the price of the shares on the stock exchange and the sum the employee paid to realize his options (buy the shares). The more the value of the company increases on the stock exchange, the larger the gains of the employee. This method is especially wide-spread among hi-tech companies, which were relatively recently established (start-up and following years) and who do not have cash in hand to pay high salaries and who prefer to invest their cash-flow in research and development and marketing. On the other hand it gives the workers an incentive, both to adhere to the company and to promote its standing as much as possible since the good of the company will directly compensate the worker through a rise in the value of the shares. The options also help to tie the employee to the company since the options are usually realized over the course of several years. The first options are usually realized two years after they were received. Q: What does this mean with regards to taxation? The profits arising from the realization of the options is liable for taxation. At what rate are these options taxed? For the last few years, there have been constant disagreements between the Income Tax Authority on the one hand and the professionals - CPAs and lawyers on the other, as to what is the correct rate of taxation. On the one hand the Tax Authorities claim that the options were given as an alternative to higher salaries, and that, in essence, they are no different from any other salary fringe benefits and are, therefore, liable at the employees regular tax rate ( in this industry, usually close to 50%). Against these claims, the professionals claim that the Income Tax Ordinances deals with options in the section which deals with capital gains, as opposed to current income such as income from a business or a salary or a profession. In addition, we are usually considering shares traded on stock exchanges outside Israel. Until Decemebr 31, 2002, capital gains or dividends from shares traded abroad were also liable for tax, as opposed to capital gains on shares traded on the Tel-Aviv stock exchange, but at a 35% tax rate only, less than the maximum tax rate. The Tax Authorities reached an agreement with a number of companies which defined the tax rate on the profits from the realization of the options and the sales of the shares as 42.5% (a compromise), which is the average of the tax rates claimed by each side. This compromise was not automatically given to all companies, only specific companies who applied to the Income Tax Commissioner and were approved. Companies that did not reach this agreement, exposed their employees to a 50% tax rate. Q: Have there been any recent innovations regarding these options? A: Yes. Since January 1,2003, a Tax Reform has been introduced which includes this sector. All options granted are classified ahead regarding the tax rate which will be deducted from the employee: regular tax (up to 50%) or a tax rate of only 25%. Q: I have heard that there have been recent court rulings which change this situation. A: Yes, but they are not yet final. There will almost certainly be an appeal. I will explain. A few weeks ago the District Court in Tel-Aviv "dropped a bomb" when it gave an adjudication that awarding options to employees under the old arrangements (before 2003) will be liable for a 35% tax rate only identical to the tax rate for capital gains on foreign stocks To date, there has been no reaction from the Tax Authorities to this ruling but it is reasonable to assume that they will appeal to the High Court. Either way this ruling has aroused great hopes among the employees in the hi-tech industry that they will be able to receive considerable tax returns arising from the difference in the tax paid (up to 50%) and the 35% tax rate. It is possible to claim tax returns up to six years back. We advise anyone interested in a tax rebate to consult a qualified accountant who will guide him/her in preparing the request. A request for a tax rebate can be prepared by "going it on your own," but experience has shown that by doing it on one's own, a non-professional may miss opportunities to increase the rebate. I have had, in the past, desperate pleas from clients who tried, initially, to claim the tax rebate on their own and ended up with a demand from the authorities to pay extra tax! I also advise on keeping up-dated on any news in the media published by the Tax Authorities on this matter. * * * Vol II Q: Who is eligible for tax reductions for children with learning disabilities? A: Until 2003 parents of children with learning disabilities could only receive tax exemptions if their child was classified - by a licensed specialist - as mentally challenged, retarded or autistic. As of 2003, it is also possible to receive tax allowances for children suffering from ADD and ADHD. In addition, PDD. has been recognized as autism. Under certain circumstances, it is possible to receive the tax reductions retroactively to the year 1999. Q: What are the conditions under which this tax exemption can be claimed? A: The new ordinances (paragraph 45 of the Income Tax Ordinances) do, however, require more restrictive conditions than before. The aim is to avoid advantage being taken of the new allowances for less serious disabilities (any employee in Israel knows how easy it is to obtain a doctor's certificate for sick leave!). In order to distinguish between a minor or medium disability, which does not justify a special tax allowance, even those treated medically or by corrective education, and a serious disability which does qualify for the new allowance, it was decided to rely on the Placement Committee (Va'adat Hasama). This is a legally recognized body consisting of professionals from various disciplines relating to a child's disability and education. Applicants will be requested to present confirmation from the Placement Committee and confirmation that the child learns in the framework of special education. Q: How exactly is special education defined? A: For the purposes of these tax allowances, special education means schools designated as special education schools such as Efrata in Jerusalem, a class for special education in a regular school and a special education kindergarten. It does not include special classes for learning reinforcement, which the child attends for part of the day. Neither does it include low-level streams (Hakbatsa). Q: Is special education the only way the tax allowances are given? A: No. In addition, parents of children receiving a disability allowance from Bituach Leumi (National Insurance Institute), may also receive tax allowances. Q: What about older children in high school? A: From the ninth grade there is no special education. Tax allowances will be given to parents of children who can present confirmation that the Ministry of Education has referred the child to the "07 stream." Q: Do the new regulations apply to young adults over the age of 18? A: No. * * * Vol I Q: What is the basis for taxation in Israel? A: Until January 1, 2003, the basis for taxation was geographic. Income accrued, produced or received in Israel was taxed. As of that date, the tax obligations are personal and apply to any Israeli resident (citizenship is irrelevant). A resident of Israel is taxable on all income arising worldwide, both passive (unearned) and earned income. This basis is similar to the tax obligations in the US and UK. Q: How is the term "resident" defined for tax purposes? A: The definition of a resident is a person whose life is centred around Israel. Points taken into account in order to reach this definition are whether a person owns property in Israel, whether he has a bank account, a car, whether his children go to school here. Where his close family resides is also relevant. Although the figure of 181 days absense from the country in a fiscal year is one of the conditions for being defined as a non-resident, it is not sufficient, on it's own, to "dis-establish" residency. Q: Are the stocks and shares I own in the US taxable in Israel? A: Since January 1, 2003, passive (unearned) income such as bank interest, dividends and profit from the sales of shares, stocks and bonds are taxable as follows: Foreign bank interest is taxable at 15%. Exchange differences (hatzmada) are exempt. As regards local shekel deposits - the interest is taxable at the rate of 10%, of the full amount on unlinked deposits. If the deposit is index or currency linked, then it is taxed at 15% on the real interest (above inflation). This includes saving programs (tochniot hisachon), (from May 8, 2000 or the date of the first withdrawal), provident funds (kupot gemel), and advanced study funds (keren hishtalmut). Illegal withdrawals from the latter two funds are, and always have been, taxable at a final rate of 35% on the total amount of the withdrawal. It is advisable to consult a qualified consultant as to what is a legal withdrawal. However, your bank or fund manager is also in a position to advise on this. Overseas dividends are taxable at 35% up to December 31, 2004. After this date the tax will be 25% as is customary abroad. Tax deducted abroad will be taken into account when calculating the difference outstanding payable in Israel. Q: How obligated am I to report my yearly income? A: In principle, every resident is obligated to report yearly to the Income Tax Authority. However, there were previously exemptions for employees earning under 530,000 NIS and for rentals when a 10% tax had been paid in advance. The aim of the tax reform is to enforce reporting by all residents However, as a former employee, I can assure our readers that the present infrastructure cannot cope with this. As a general guideline the following must report:
  • A resident who owns a business
  • A self-employed worker
  • A resident with a bank account abroad
  • A resident with income from abroad , unless tax is deducted at source by a bank in Israel.
  • A resident who has a trust fund must file a report for the year 2003 and declare the existence of the trust fund. As of writing, there is no final legislation with regard to trust funds but it is in the pipeline. I have available a booklet detailing the proposed tax laws for irrevocable Trust Funds. Revocable Trust Funds are regarded as regular income.
  • A resident holding an asset abroad. Cafe Oleh experts have been chosen for their knowledge and reputation. Cafe Oleh does not take responsibility for any advice they offer. Click here to send us your questions for Miriam.
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