Your Aliyah Tax Wizard
As Israel celebrates its 60th anniversary, strenuous efforts are under way to attract 60,000 new immigrants and returning residents to Israel. World events are lending a hand - looming recession in the US and UK, anti-semitism in France and xenophobic violence in South Africa.
On the tax side, a new bill before the Knesset proposes to grant a flat 10 year tax exemption for all types of foreign source income and capital gains derived personally by new or returning residents or via a foreign resident company.
Obviously, there's more to it than that. Here's a selection of frequently asked questions and answers about aliya-related tax matters.
Will I pay tax on income/capital in my old country?
Once you become an Oleh and make Israel your permanent home or your centre of vital interests, the tax authority in your old country usually cannot treat you as resident of that country any more according to Israel's tax treaties with over 40 countries. This is even easier under Israel's tax treaties with the United States and South Africa which state that an "Oleh" who's residency is in doubt (dual residency) shall be deemed to be Israeli resident. As an Israeli resident, you should only pay tax in your old country on income and gains derived in the old country.
There may be exit taxes (capital gains tax) in some countries when you leave, such as Canada, the Netherlands and South Africa. In the case of South Africa Olim and returning residents may pay 10 percent SA tax on assets taken out of South Africa after using the R2m-per-person exchange control exemption. It is advisable to obtain a tax clearance certificate from the SARS. Thereafter, you should only pay SA tax on SA income.
Special US rules apply to US citizens and green card holders living in Israel. The US-Israel tax treaty has complex foreign tax credit rules.
What tax will I pay in Israel?
There are no taxes in Israel on the importation of wealth (investments, cash, etc) into Israel. Once the Aliya tax reform bill is passed by the Knesset, you will be exempt from Israeli tax on non-Israeli source income and gains for 10 years. This will apply to new residents and to returning residents who lived outside Israel at least 5 years (if you return in 2008 or 2009) or 10 years (if you return in 2010 or later).
Currently the exemption is more restricted and for 4 - 10 years. On Israeli source investment income you will usually pay 20% Israeli tax and 10%-47% tax on employment income from Israeli sources, plus national insurance at various rates. These tax rates will also apply to foreign source income once the exempt period(s) have expired.
If you place the money in a non-shekel "Patach" deposit at an Israeli bank for at least 3 months, you may be exempt from Israeli tax for 20 years (if you are a new resident) or 5 years (if you are a returning resident), subject to certain conditions.
What about income/capital I receive from a trust or assets I hold through a trust?
If you are the settlor and/or contributed the assets to the trust, it will be taxed like you. If another non-Israeli resident contributed the assets to the trust, it may be exempt from Israeli tax if various conditions are met - specialist advice should be obtained.
How much money can I bring into Israel?
There are no exchange controls in Israel. You can keep your money and assets anywhere you want.
Is there a look back provision or grandfather clause in the contemplated law for residents who returned recently or people who made aliya in 2007? Or are they only targeting future Olim?
Unfortunately, under the present proposals, anyone who became a new or returning resident before 2008 would not enjoy the proposed new Israeli tax benefits. There may be more limited benefits in your case, which may be enhanced if you did appropriate pre-arrival planning - specialist advice should be obtained.
What happens with foreign pensions?
Pension payments are exempt in Israel for the first 5 years after you become Israeli resident or 10 years under the proposed new law. Thereafter, a limited partial exemption may apply. However, the definition of a pension is not clear. Does it cover withdrawals from arrangements such as an IRA (individual retirement account) in the US, or an RRSP accounts in Canada or SIPPS in the UK or "super" accounts in Australia? The Israeli Tax Authority has been working on this question since 2003 with no published tangible results yet. Also, if you come to Israel at, say, age 30, and don't receive any pension in the 5 - 10 year exemption period after your arrival, you miss out on the exemption if you receive a pension later on.
Do I have to report all my assets to the Israeli Tax Authority?
Generally not. But if you start a business in Israel, you may be asked to file a capital return - this is common practice for Israeli business persons. Your accountant will help you through this process.
If I transfer money to an Israeli bank account, do I have to report it to the Israeli Tax Authority?
No, unless you committed a criminal act! The above is extremely brief and general. It is recommended to obtain specific legal and tax advice in each country at an early stage.
As always, consult experienced tax advisors in each country at an early stage in specific cases.
Leon Harris is an international tax partner at Ernst & Young Israel.
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