Tax Benefits for Immigrants and Returning Residents
by Benny Kalifi, Adv. and Ibrahim Atrash, Adv. (C.P.A)
In order to encourage new immigration to Israel as well as the return to Israel of former Israeli residents, and in order to facilitate and streamline the adjustment period to Israel for new immigrants and returning residents, various tax benefits for both new immigrants and returning residents have been legislated over the years. A decade or so ago, as part of the celebrations of Israel’s 60th anniversary and the State’s stated goal to encourage new immigrants to Israel and the return to Israel of Israeli citizens who had left, the State of Israel legislated significant and extensive tax benefits for immigrants and veteran returning residents. In the following article, we will address the major tax benefits applicable to returning residents and immigrants. Please note, that the following will not address tax reliefs or benefits concerning customs and imports.
“New Immigrant”, “Returning Resident”, “Veteran Returning Resident”
The Income Tax Ordinance distinguishes between a person who becomes an Israeli resident for the first time and a veteran returning resident, who are both entitled to similar tax benefits, and a returning resident. The distinction between a returning resident and a veteran returning resident is made based on the number of years the returning resident was a foreign resident. A “returning resident” is an individual who returns to Israel after having been a foreign resident for six consecutive years while a “veteran returning resident” is an individual who returns to Israel after having been a foreign resident for ten consecutive years.
It should be noted that the question concerning exactly when a person ceased being an “Israeli resident” or when he resumed being an “Israeli resident” is a complex legal question that depends on a wide array of circumstances. A person is considered an Israeli resident insofar as his “center of life” is in Israel, and various quantitative presumptions have been determined in that regard, which provides that a person will be deemed a person whose center of life is in Israel if such presumptions are met and have not been refuted.
The Tax Benefits for a “Returning Resident”
As a general rule, a returning resident is exempt from tax on specific foreign income for five years commencing as of the time such person resumed being an Israeli resident. The tax exemption applies to income from allowance/pension, royalties, dividends, and interest generated or accrued abroad or which derive from assets situated abroad that the returning resident purchased whilst he was deemed/ considered a foreign resident (including certain relief regarding securities purchased from income generated by other securities) and which do not constitute business income.
Additionally, a returning resident is exempt from tax for ten years on capital gains from the sale of an asset abroad (including shares or other securities in foreign companies which do not constitute a right in and to an asset in Israel), which such person purchased whilst he was a foreign resident. If the asset is sold after ten years as of the date of the return to Israel, the returning resident shall be partially exempt from the tax on a linear basis.
The Tax Benefits for a “Veteran Returning Resident” and a New Immigrant
Please see below a brief description concerning five main tax reliefs for new immigrants and veteran returning residents as follows:
1. As a rule, a new immigrant and a veteran returning resident are exempt from tax for a period of ten years concerning all income generated or accrued abroad or which derives from assets abroad. Such exemption commences as of the time they became Israeli residents.
It is noted that as opposed to the tax exemption that applies in the matter of “regular” returning residents, the exemption that applies to new immigrants and veteran returning residents also applies to income from employment and business and vocation that was generated abroad.
However, in the matter of the exemption that applies to income from employment, business and vacation abroad, it is necessary to examine the entire circumstances and make sure that the income indeed was entirely generated abroad. In the case of consultants and professionals in
liberal professions, the tax authorities examine with scrutiny whether part or all of the work was performed in Israel, and income that was generated in Israel will be subject to full taxation.
2. Additionally, a new immigrant and veteran returning resident are exempt from tax for ten years on capital gains from the sale of assets abroad. If the asset is sold after ten years from the date of the return to Israel, the new immigrant and the veteran returning resident shall be
partially exempt from the tax on a linear basis. It shall be emphasized in this matter that as opposed to the tax benefits that apply to a “regular” returning resident, the exemption from capital gains tax that applies to new immigrants and veteran returning residents also applies to assets that were purchased by them abroad after they immigrated or returned in Israel. It shall be further noted that the said exemption from capital gains shall not apply in cases in which the capital gains or income produced from an asset that was received is a tax-exempt gift in Israel, such as a gift from a relative, which was received since January 1, 2007.
3. Additionally, new immigrants and veteran returning residents are entitled to a tax relief, which is unlimited in years, regarding income from a pension from abroad, such that the total tax amount that applies to such pension will not exceed the tax that would have applied had the individual remained a resident of the other country.
4. There is additional relief for new immigrants and veteran returning residents who hold and manage foreign companies from Israel, such that during the period of ten years from the date of immigration or return to Israel, such companies will not be deemed Israeli resident companies due only to the fact that they are controlled and managed by such new immigrant or veteran returning resident in Israel. Additionally, there are reliefs in the matter of classifying foreign companies as companies that are subject to tax in Israel in the framework of the CFC rules and in connection with tax aspects that apply to trusts.
5. In addition to the said exemptions and reliefs, a veteran returning resident and a new immigrant is exempt from filing annual reports to the Tax Authority for income abroad. The exemption from filing a report to the Tax Authorities, for a period of ten years, applies to the above-mentioned exempted income as well as to the obligation of filing a declaration of capital with respect to the assets abroad.