Thinking of coming back to Israel?
How the new tax package can influence your pocket
If you are thinking of coming back to Israel and or immigrate to the country to make Aliyah, you ought to know what your rights are. The Israel Tax Authority recently announced a package of attractive tax benefits for new immigrants and returning residents in honor of the 60th anniversary of Israel's independence. The new tax benefits immigrants and returning residents were included in a proposed law that already passed its first reading before the Knesset ("Proposed Law") and is expected to pass second and third readings.
In the event that the tax reform package is passed by the Knesset, it will apply to eligible new immigrants or returning residents who immigrated or returned to Israel from January 1, 2008 and thereafter.
So who does the reform apply to?
Under the current law, there are two classes of Israeli tax payers eligible for tax benefits, "new immigrants" who are defined as individuals who became residents of Israel for the first time, and "returning residents" who are defined as individuals who were Israeli tax residents in the past, and resided abroad for a period of at least three consecutive years. According to the Proposed Law, certain returning residents who ceased to be Israeli residents, and resided abroad for a period of ten years, at least eight of which were from after the taxpayer ceased to be an Israeli tax resident, are removed from the category of "returning resident" and are to be classified as "senior returning residents".
Here are some of the highlights regarding the proposed tax benefits in comparison with the current law:
Tax exemption on passive income
Current law - New immigrants are exempt from tax for a period of five years from the date of aliyah on passive income from foreign sources. The exemption is predicated on the condition that the assets that gave rise to the income were owned by the taxpayer before originally becoming an Israeli resident. Returning residents are given similar relief on passive income arising from assets that they purchased during the period of non-residence.
Proposed law -The exemption will be extended to ten years for new immigrants, and senior returning residents will also be eligible for the exemption .
Tax exemption on business income, vocation, and salary
Current law - A new immigrant is exempt from tax on business income for a period of four years from first becoming an Israeli resident, provided that the income was from a business that the immigrant had for at least five years before first becoming an Israeli tax resident. A returning resident is not eligible for this exemption.
Proposed law - This exemption will also be extended to a period of ten years, and a senior returning resident will also be eligible for the exemption.
Tax exemption from capital gains tax on foreign assets
Current law - A new immigrant is exempt for a period of ten years from capital gains tax on the sale of assets outside of Israel that were purchased before the new immigrant first became an Israeli tax resident. Where the taxpayers sold the asset after ten years, a partial exemption exists based on a fixed calculation. A returning resident is also eligible for this exemption as long the foreign asset was not a right, directly, or indirectly in an Israeli asset.
Proposed law - No changes.
In another new change, a new immigrant or a returning resident will have the option during his first year of residency to choose not to be considered a resident of Israel. This provision allows immigrants who are still unsure of their intention to remain permanently in Israel and to have a trial of one year during which they can live in Israel without losing out on tax benefits if they decide not to remain in Israel after the acclimation period is up.
For companies managed by new immigrants a new rule that does not currently exist will apply. According to the proposed change, companies managed by new immigrants, during years in which new immigrants and returning resident are exempt, will not be considered Israeli resident companies. This is an exception to the general rule under Israeli tax law that foreign companies that are managed and controlled by Israeli tax resident are subject to Israeli tax.
Currently, exemptions from filing exist only within a certain framework. According to the proposed changes, new immigrants and returning residents will be eligible for a complete exemption from filing tax returns relating to income earned from abroad. The exemption will be both on the individual level and on a corporate level (for companies managed by new immigrants or returning residents).
It is important to emphasize that the discussion above refers to proposed legislation which still awaits to be reviewed and perhaps modified by a Knesset Committee prior to its second and final readings in the Knesset in order to become law. Consequently the legislative process and changes to the Proposed Law should continue to be monitored.
The authors are Avi Noiman, CPA (Isr.), Partner and Ariel Schaffer, CPA, Adv. Senior Manager at Tax Department of PricewaterhouseCoopers - Kesselman & Kesselman
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