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Taxes: Proposed Israeli tax reform for new residents
LEON
HARRIS , THE JERUSALEM POST Israel is
about to celebrate its 60th anniversary. And in high spirits the government has
just proposed a tax reform intended to attract more people around the world to
immigrate to Israel (aliya) or return to Israel if they left the country. This
reform will presumably increase the population, which presently numbers around
7.2 million. And it will provide an alternative to the economic downturn sparked
by the subprime credit crisis. The new tax proposals
for olim and returning residents are contained in an announcement issued by the
Israel Tax Authority on March 13. High hopes are expressed. According
to Finance Minister Ronnie Bar-On: "The tax reform for new and returning
residents will stimulate aliya and bring back Israelis living abroad, including
academics and business people, strengthen the Israeli economy and encourage it
to grow." According to Immigration Absorption
Minister Ya'acov Edri: "This program is a historic breakthrough that will
make it possible for many Jewish people around the world and hundreds of thousands
of Israelis living abroad to come to Israel without worrying about the financial
side." What is proposed? Following
is a summary of the latest tax proposals: Ten-year
exemption: It is proposed to grant olim a broad 10-year exemption from tax for
overseas assets and income of all types from foreign sources, including dividends,
interest, rent, business and professional income, salary and capital gains. In
other words, both active and passive income and capital gains from foreign sources
would be covered by the exemption. If enacted, this
proposal would be a substantial improvement. Currently, passive income from dividends,
interest, rent, royalties and pensions are exempt from Israeli tax for five years
after becoming an Israeli resident if they relate to foreign assets held before
becoming a resident; capital gains on such assets are exempt for 10 years; income
from a business conducted abroad for five years before becoming an Israeli resident
may be exempt for four years after becoming a resident.
Returning residents: According to the proposals, returning residents may also
enjoy the 10-year exemption for foreign income, but only if they qualify as an
"immigrant for income tax purposes." This will generally apply to someone
who lived abroad for at least 10 years after leaving Israel. However, the qualifying
period would be "only" five years in 2008 and 2009 if that person was
a foreign resident on January 1, 2008. Currently, returning residents enjoy the
existing five- or 10-year exemptions for foreign source dividends, interest, rent,
royalties, pensions and capital gains if they resided permanently abroad at least
three years and acquired the assets while residing abroad.
Acclimatization: An "acclimatization period" is proposed. For one year
after arrival in Israel, an individual can elect to be considered non-resident
for Israeli tax purposes. This is to give the individual time to make up his mind
where to reside. Currently, an individual is considered a resident if their center
of living is in Israel. It seems this test will continue, but be modified by the
above one-year "acclimatization period."
Control and management: At present, subject to any relevant tax treaty, a foreign
company is resident and taxable in Israel on its worldwide income if its business
is "controlled and managed" in Israel. According to the proposals, foreign
companies will no longer be classified as Israeli resident (and fully taxable
in Israel) merely because their shareholders make aliya. Instead, foreign-source
income of the company would be exempt from Israeli tax under the proposals. Nevertheless,
Israel would continue to impose tax on income generated in Israel by the foreign
company (and the foreign tax position will need to be checked).
Less tax reporting: Under the proposals, individuals and companies under their
control won't have to file Israeli tax returns covering exempt foreign source
income. But Israeli-source income will be reportable and taxable under the usual
Israeli rules. Initial comments
Following are a few preliminary comments coming
to mind at this stage; things may be clarified soon:
Effective date: It is not mentioned in the announcement. Also, it is unclear whether
olim and returning residents already in Israel may enjoy the new proposed exemption
for any remainder of the 10-year period after becoming Israeli residents.
Next steps: The proposals in the announcement are brief and expressed in lay terms.
The next steps are to draft a bill and submit it to the cabinet and Knesset. The
intention is to give priority to this process. It remains to be seen what will
be enacted and how soon. Beneficial? The proposed
10-year exemption for active and passive foreign-source income is welcome. But
care is still needed. Foreign pensions and retirement
plans: The most glaring omission in the proposals concerns foreign pensions and
foreign retirement plans; the Israeli tax treatment after the expiry of the proposed
10-year exemption is unclear. The present tax law situation is a mess and the
Israel Tax Authority has yet to deliver on promises since 2002 to sort it out.
Israeli pension and retirement reform may clarify the tax treatment for planned
similar Israeli products. Pensioners who immigrated to Israel cannot turn back
the clock when they see the outcome; they can only leave Israel, or obtain specialist
advice as soon as possible. Post arrival assets:
It is unclear if the proposed 10 year exemption will cover assets abroad acquired
AFTER becoming an Israeli resident. Returning
residents: It may become necessary to reside abroad five-10 years, compared with
only three years now, to obtain a foreign-income and capital gains exemption.
So expect less returning residents, not more.
Telecommuters: People who do business in Israel for a foreign company, perhaps
using the Internet, will make the foreign company taxable in Israel on its Israeli-source
profit. The individual will also be taxed on his/her salary or other compensation
unless the proposed 10-year exemption for foreign earnings applies.
Trusts: They are not mentioned in the proposals. Under a new tax regime implemented
in 2006 in Israel, if a foreign settlor (grantor) of a trust makes aliya or is
a returning resident, the trust will become taxable in Israel but enjoy the same
temporary exemptions as the settlor. Presumably, this will include the new proposed
10-year exemption for foreign source income and gains. Numerous double-tax and
retroactive-tax issues remain regarding trusts for multinational families. To
sum up, Israel wants to make aliya and returning to Israel less taxing. But this
has not yet been enacted and some issues remain, so advance planning will be needed.
Happy 60th anniversary Israel and Israelis everywhere. As
always, consult experienced tax advisors in each country at an early stage in
specific cases. leon.harris@il.ey.com
Leon Harris is an international tax partner
at Ernst & Young Israel.
Best regards,
Leon
Harris
Ernst & Young Israel
Partner, International
Tax Services
23, Aminadav Street, Tel-Aviv 67067, Israel
Tel:
972-3-6278 660 / 972-3-6278 601
Cell: 972-54-266-1205 / 972-54-644 9398
Fax: 972-3-56 33 424
Email: leon.harris@il.ey.com
/ leonharr@gmail.com
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