People on the Move
Israel has undergone major changes to its tax system over the past few years. The tax system was revised as of the year 2003 from a territorial system to one of worldwide global taxation.
In addition, the taxation of trusts law came into force in the year 2006 (Amendment 147 of the Tax Ordinance) and Israel also passed a law amending its Income Tax Ordinance (Amendment 168 of the Tax Ordinance) which provides comprehensive tax benefits to those who immigrate to Israel as well as to expatriate Israelis who return to reside in Israel. The purpose of this amendment is to encourage individuals to change their jurisdiction of residency to Israel in order to enhance its economy and its population.
Definitions
The amendment is relevant to three classes of residents:
1. New immigrants -those who become residents of Israel for the first time.
2. Returning residents - this class is also referred to as 'regular' returning residents and relates to individuals who resided abroad for a period of at least six consecutive years. The six year period relates to those who emigrated from Israel after January 1, 2009. For those who emigrated from Israel until December 31, 2008, they will be considered returning residents after a period of three years abroad.
3. Long-standing returning residents -those individuals who return to reside in Israel after they resided abroad for a period of at least ten consecutive years.
Irrespective of these definitions, there is a regulation which permits an individual who returns to reside in Israel during the years 2007, 2008 or 2009 to be considered a long-standing returning resident even if he resided abroad for a period of at least five consecutive years rather than ten years.
The Benefits: New Immigrants and Long-Standing returning residents
Exemption on all foreign source income
The amendment provides an exemption to new immigrants and long-standing returning residents from the payment of taxes on all forms of income, active or passive, earned or derived from sources outside of Israel for a period of ten years. This includes passive income, earned income and capital gains. The addition in the amendment which further provides a great advantage is that there is no requirement that the asset from which the income is derived be purchased prior to the change of residency of the relevant individual. The exemption applies even if the assets are purchased after the individuals change their residency to Israel during the ten year period.
Management and Control of Foreign Corporations
The Israeli tax ordinance provides that a corporation is regarded as an Israeli resident if it is incorporated in Israel or if the management and control of the corporation is conducted from Israel. A new immigrant who owns and manages a foreign corporation with business activities abroad may expose the foreign corporation to Israeli taxation simply due to the change of residency of the owner of the company to Israel. The amendment provides that a foreign company will not be considered an Israeli resident solely due to the fact that its owner and manager moved to Israel. This enables the company to conduct its business activities abroad without subjecting the income derived from such activities to taxes in Israel.
An Accommodation Year
A new immigrant or a long-standing returning resident may be entitled to a one year period in which they will not be considered residents of Israel for the purpose of its tax laws. This enables individuals to get settled and decide whether they wish to change their jurisdiction of residency to Israel. In order to enforce this benefit, certain procedures and formalities must be followed with various offices of the Israeli Government.
'Regular' returning residents
The benefits to returning residents relates to assets that such residents purchased during their residency abroad after said resident was no longer a resident of Israel.
These include the following:
1. Passive income derived from said assets (again, those purchased while a resident of another country) are exempt from taxes for a five year period.
2. Interest and dividend income derived from "preferred securities" are exempt from taxes for a period of five years. The definition of "preferred securities" is those securities which are traded on foreign exchanges and which were purchased while the individual resided abroad.
3. Capital gains from the same assets discussed above are exempt from taxes for a period of ten years as long as there is no right via the asset, whether directly or indirectly, to assets located in Israel.
Definition of Foreign Resident
An important issue to consider by expatriate Israelis who return to reside in Israel is the actual termination of their residency in Israel upon their departure to reside abroad.
The definition of a foreign resident under the Tax Ordinance is as follows:
1. For a corporation, as mentioned previously, a foreign corporation remains as such and will not be considered an Israeli resident solely due to the fact that the management and control of the corporation is conducted in Israel as a result of a new immigrant or long-standing returning resident moving to reside in Israel. This will be the case for a ten year period from the date the shareholder and director moved to Israel.
2. For an individual - an individual will be considered a foreign resident from the date of departure from Israel if:
a. within a two year period the individual spent 183 days per year abroad; and
b. During the following two years, the center of life of the individual is abroad.
Here the issue of residency becomes quite complicated due to the center of life test under the Tax Ordinance. This test is the test for tax residency in Israel. While there are legal presumptions as to the number of days spent in Israel, these are presumptions and the ultimate test is the center of life test which is very fact specific and includes many variables that require consideration. The center of one's life is the place in which the individual has the greatest ties. Some of the facts reviewed include the residency of family members, such as a spouse and children, the ownership of real property, economic ties, the participation in charitable organizations, and other similar facts.
Reporting Obligations
New immigrants and long-standing returning residents are not required to file tax reports with the Israeli Tax Authority with respect to their foreign income or assets during the ten year tax exemption period. This relates to both annual tax returns and to declarations of assets.
Conclusion
The matters can become quite complex. It is very important for individuals to seek legal advice prior to their arrival in the case of new immigrants and in the case of Israelis who change their residency to another country also upon their departure to ensure that they sever their ties with Israel and are no longer considered Israeli residents for tax purposes.
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