Tax Benefits for New Immigrants and Returning Residents to Israel and Expansion of the Definition of Foreign Residents

Dunsky Knobel Beltzer, one of MGI's newest members located in Tel-Aviv, Israel are pleased to present the new instructions in Israel in connection with tax benefits for new immigrants and returning residents to Israel. Dunsky Knobel Beltzer specializes in this subject and are available to accompany the client in the process.

On September 16 2008, the Israel Income Tax Ordinance was amended to include a broad reform of income tax laws granting tax benefits and relief to new immigrants and returning residents to Israel. The reform's goal is to have hundreds of thousands of Israelis who today live abroad return to Israel, and to increase the number of new immigrants.

The main points of the reform are as follows:

1. A tax exemption for all income earned abroad for a period of 10 years from the date of immigration to Israel; where income includes all income earned outside of Israel, either from the sale of assets and investments abroad, or from ordinary income.

2. Creating a new tax status [a "returning resident" who will be considered an immigrant for income tax purposes] for an individual who was a foreign resident at least 10 years from the date that he originally left Israel [hereinafter: "veteran returning  resident"]. Also issued was a Temporary Order, which stated that during 2007-2009 the period that will entitle an individual to be considered an "immigrant for income tax purposes" will be only five years, if on January 1, 2007 he is considered a foreign resident.

3. Setting up an adjustment track - providing a one year period of adjustment for an individual, from the year of his arrival in Israel, and, at his request, he will not be considered a resident of Israel for income tax purposes.

4. Granting a tax exemption for companies which are managed by a new immigrant or by a veteran returning resident - said companies will not be considered Israeli resident companies and will not be taxed in Israel. Thus, the new immigrant or returning resident will be able to earn exempt income on the basis of various guidelines, also through companies which they control and operate abroad, on condition that the income is not earned in Israel.

5. An exemption from reporting on exempt foreign income and assets.

6. A change in the determination of a returning resident - a returning resident will be entitled to tax benefits after an absence of three years [and not 6 years, as was the situation before the Amendment], a foreign resident will be exempt from capital gains tax for a period of 10 years, and will be exempt from tax on passive income earned abroad for a period of 5 years.

The definition of a foreign resident was expanded, such that an Israeli resident who met certain cumulative criteria of an absence of four consecutive years abroad, and during the last two years of the last four years, complied with the stringent terms of "center of life abroad", will not be considered an Israeli resident from the first day that he left.

In order to determine an individual's "center of life", family, economic and social ties will be considered, and will include, inter alia, the following:
 
A. His permanent residence.
B. His and his family's place of residence.
C. His place of regular or permanent employment or his permanent place of employment.
D. His active and major center of economic interests.
E. His involvement in organizations, associations, or other institutions.
 
In addition, various presumptions were established for determining an individual's center of life, as detailed below (the presumptions may be rebutted).

A. An individual who spent at least 183 days in Israel during any tax year - the center of life is determined to be in Israel.
B. An individual, who in any tax year, spent 30 days in Israel, at least, and the total period of stay, in a tax year, and in the two years preceding it, was 425 days at least - the center of life is determined to be in Israel.

In addition, the Minister of Finance was granted the authority to set terms, whereby an individual, who is not a resident of Israel on the basis of that said above, will be considered a resident of Israel, if he was employed by one of the following:

A. The State of Israel.
B. A local authority in Israel.
C. A government company.
D. A government authority or entity established by law.
E. The Jewish Agency, Jewish National Fund, or Keren Hayesod-United Israel Appeal.

In addition, the Minister of Finance was granted the authority to set terms; whereby an individual, who is a resident of Israel on the basis of that said above, will not be considered a resident of Israel, on the basis of terms to be formulated.

Inheritance Tax
We would also like to note, that for now, Israel does not have any inheritance tax law, and accordingly anyone who receives assets by inheritance is not subject to tax in Israel.

For further information and/or clarification:

Dunsky Knobel Beltzer Yakar & Co.
Certified Public Accountants (Isr.)
20 Hamasger St., Tel-Aviv 67776
T: 972-3-6393020; Fax: 972-3-6393021
E: mgi@mgi-israel.co.il
W: www.mgi-israel.co.il

2009-10-30