The Milchan Law?

Your Taxes

An accountant calculator taxes 150 (photo credit: Ivan Alvarado / Reuters)
An accountant calculator taxes 150
(photo credit: Ivan Alvarado / Reuters)
Last Tuesday, the Israel Police announced the end of investigations regarding Case 1000 and Case 2,000.
According to the announcement, one of the main items investigated was referred to as the “Milchan Law.” The announcement said: “The prime minister is alleged to have acted to promote the extension of tax for a returning resident beyond 10 years, a benefit that has significant economic value for Milchan. According to this allegation, the PM turned in this matter to the Finance Ministry, but the Finance Ministry people blocked the subject on the grounds that such a benefit is not consistent with the national interest and preservation of the public purse.”
10-year tax holiday: Section 14 and related sections in the Income Tax Ordinance (ITO) grant new residents and so-called senior returning residents (who resided abroad at least 10 years) an exemption from Israeli tax and reporting requirements for 10 years regarding foreign-source income and capital gains. This is sometimes known as the “10-year Israeli tax holiday” for overseas income and gains.
After 10 years?
Section 14(d) of the ITO, as amended by Amendment 171, appears to be the so-called “Milchan Law.”
This section empowers the finance minister to extend the 10-year exemption in certain circumstances, if approved by the Knesset Finance Committee.
Amendment 171 to the ITO changed those circumstances.
The amendment was passed on July 15, 2009, but has retroactive effect to January 1, 2008.
It seems the Finance Ministry blocked Section 14(d) by never sending any proposal to extend the 10-year exemption to the Knesset Finance Committee for approval.
But what was the change in circumstances envisaged in Amendment 171?
Before Amendment 171: Before Amendment 171, the law allowed regulations extending the tax holiday to be issued regarding an individual whose main business activity is abroad and who made investments in Israel while residing abroad, before becoming an Israeli resident. But if the individual is a returnee who left Israel when aged 18 years or more, the individual would need to have resided abroad at least 20 continuous years to be eligible.
In practice, no such regulations were promulgated.
After Amendment 171: After Amendment 171 became effective, Section 14(d) allows regulations to be promulgated extending the 10-year exemption for overseas income by up to 10 more years for new residents and senior returning residents.
This is conditional on the individual making a substantial investment in Israel that promotes national goals for the economy before or within two years after becoming a new resident or a senior returning resident, or before or within two years after the regulations come into effect.
Moreover, the finance minister is allowed to prescribe differing extension periods based on, among other things, the type of investment, the amount and the geographic location.
Again, in practice, no such regulations have been promulgated to date.
What’s the difference? Among other things, it seems Amendment 171 reduced the period of residence abroad needed for returning residents from 20 years to 10 years.
Questions: Several questions of an economic nature come to mind. Why was Section 14(d) amended? If the Knesset passed the amendment, is there still a problem? Would it not encourage investments into the Israeli economy and generate growth and taxes that way? What investment criteria were proposed?
As always, consult experienced tax advisers in each country at an early stage in specific cases. The writer is a certified public accountant and tax specialist at Harris Consulting & Tax Ltd.