Your Taxes: Aliyah exemption has its limits

During the 10-year tax holiday, there is also immunity from anti-avoidance rules regarding “management and control,” “controlled foreign companies” and “foreign professional companies.”

US tax form (illustrative) (photo credit: INGIMAGE)
US tax form (illustrative)
(photo credit: INGIMAGE)
New residents and senior returning residents (lived abroad 10 years) who took up Israeli fiscal residence since January 1, 2007, are generally exempt from Israeli tax on non-Israeli source income for 10 years.
During the 10-year tax holiday, there is also immunity from anti-avoidance rules regarding “management and control,” “controlled foreign companies” and “foreign professional companies.”
However, the 10-year exemption does NOT apply to income for work done in Israel for a foreign firm. What does this mean? It seems the Aliyah and Integration Ministry’s explanation is long and confusing. Below we review an example on the website of the Aliyah and Integration Ministry (Immigration and Absorption Ministry before 2017) and add a few necessary clarifications.
Michael’s case
According to the Aliyah and Integration Ministry, “Michael is a Jewish man who has lived in Brooklyn for his entire life. In 2008, at the age of 70, he decided to make aliyah with his family. Michael is a successful lawyer who owns a company in the Bahamas that provides consultation services to clients in Canada and the US.”
According to the ministry: “Michael and his family will be considered first-time Israeli residents. They will be able to request a one-year “adjustment period,” during which they will not be considered Israeli residents for tax purposes, in order that they can assess their aliyah during that same year. Following that year, and during the next nine years, Michael will be exempt from taxes on his income from salary from his work at the consulting firm, as long as it is derived from abroad....
“In accordance with the amendment to the law regarding a foreign company, his consultancy firm will not be subject to the laws pertaining to foreign companies, and his share of the company’s profits will not be considered as having been generated in Israel... and during the period of benefits, the overseas companies owned by Michael will not be considered under management or control in Israel, and will therefore not be considered Israeli-based. During the years of exemption, Michael will not be obligated to report his income from abroad, which is tax-exempt. Michael will only be obligated for full taxes on income from investments and activities in Israel.”
Our comments
• First, if Michael is a US citizen, he would still be liable to US taxes.
• Second, “the company in the Bahamas that provides consultation services to clients in Canada and the US” needs further analysis. Where were the consulting services since 2008 really provided?
Section 4A of the Income Tax Ordinance (ITO) clarifies that business income is derived in the place where the business activity takes place, and employment income derived where the work takes place. So where does the Bahamas company conduct its business? In the Bahamas, the US or Canada? Or does it do business in Israel, in which case the Bahamas company would have taxable business activity in Israel. The location of the clients is irrelevant.
• Third, the Aliyah and Integration Ministry would do well to point out reportable tax position 13/2016.
A reportable income tax position is a position contrary to a position published by the ITA by the end of the year concerned if the tax advantage exceeds NIS 5 million in the tax year or NIS 10m. over four years. So if your tax planning is at odds with an ITA position, you must tell the ITA so it knows where to start a tax audit.
Reportable tax position 13/2016 emphasizes that the fact the Knesset excluded companies controlled and management from being Israeli resident does not change the fact that activity conducted in Israel and resulting income are taxable for immigrants.
• Fourth, if the Bahamas company conducts any part of its activity in Israel, VAT Law Section 60 requires registration and reporting for Israeli VAT purposes.
What should an immigrant do?
A new or senior returning resident doing in business in Israel is required to pay Israeli tax from day on income from activities performed in Israel. That is the case whether or not the individual formally makes aliyah. But if that individual spends some time working abroad – by flying abroad – a diary should be kept noting the time worked in Israel and abroad respectively.
Income attributable to days worked abroad is in principle exempt from Israeli income tax. But check the income tax, VAT and Social Security situation in each country at the outset. Last but not least, register and report promptly and keep books that meet detailed requirements not found in most other countries. An accountant can assist in this regard.
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 Horoviz Consulting & Tax Ltd.

Tags taxes