Tax Reform for New Immigrants and Returning Residents

The Israeli Bureau of Finance recently approved a tax reform regarding benefits granted to both new Israeli immigrants and "returning residents" starting from January 1st, 2008. The reform was initiated by the ministry of immigrant absorption and the Israeli Tax Authorities, as a part of the project "returning home- Israel's 60th".

 

The reform aims to encourage the Israelis leaving abroad to relocate to Israel, providing the above beneficiaries with extensive tax benefits

 

In addition, the reform is projected to serve as a catalyst for investments in Israel and would contribute to the Israeli financial and social strength.

 

After its approval the bill will expand, simplify and elaborate a line of tax benefits regarding the tax liability and reporting obligations of the new immigrants and returning residents, in relation to their income generated outside Israel.

 

The following is a brief summery of the tax benefits applied by the reform:

 

1. Expansion of tax benefits for returning residents

    

   A new status is being set - "senior returning resident", a returning resident who has been living abroad for at least 10 years.

    

   In order to encourage the former Israeli residents to return to Israel during 2007 and 2009 the "senior returning resident" status would include returning residents who were non-Israeli residents on January 1st, 2007 and whom were living abroad for at least 5 years As well.

    

    

2. Tax exemptions on Passive income

    

   Currently, during the first 5-year period (starting at the arrival/returning date) new immigrants and standard returning residents are tax exempt regarding their passive income deriving from assets purchased outside of Israel prior to their arrival (Hereinafter - old assets). For that matter, "Passive income" includes dividends, interests, royalties, rent and allowances.

    

   According to the reform, during the first 10-year period (starting from arrival/returning date) new immigrants and 'senior returning residents' will be tax exempt regarding their passive income deriving from assets purchased outside of Israel whether these assets are old or new (assets purchased after the arrival / returning date to Israel).

    

3. Tax exemption of capital gains

    

   Currently, during the first 10-year period starting as of the arrival/returning date new immigrants and standard returning residents eligible for tax exemption regarding their capital gains deriving from old assets.

    

   According to the reform, during the first 10-year period starting from day of arrival/returning, new immigrants and 'senior returning residents' will be tax exempt on capital gains deriving from assets purchased outside of Israel, whether these assets are old assets or new.

    

4. Business income

    

   Currently, during the first 4-year period (starting on arrival date) new immigrants are tax-exempt on their business income deriving from business conducted outside of Israel for at least five consecutive years prior to their arrival to Israel (Hereinafter - old business).

    

   According to the reform, however, during the first 10-year period (starting on the arrival/returning date) new immigrants and 'senior returning residents' would be tax exempt regarding business incomes deriving from business conducted outside of Israel as well.

    

5. Adaptation period

    

   According to the current situation an Israeli resident is tax liable in Israel regarding its foreign income, and a non - Israeli resident is tax liable only in Israel regarding an income generated in Israel.

    

   According to the reform, new immigrants as well as 'senior returning residents' will be entitled for a 1-year adaptation period during which they would not be considered as Israeli residents, provided their notification to the Israeli Tax Authorities regarding this request during the first 90-day period starting at the arrival/returning date.

    

6. Foreign corporations being controlled and managed by new immigrants and 'senior returning residents'

    

   According to the current situation, an Israeli corporation is defined as such under the conditions of being controlled and managed from Israel.

    

   According to the reform, however, corporations that are being managed and controlled by new immigrants or 'senior returning residents' will not be considered as Israeli corporations, and therefore, would not be taxable in Israel other than regarding an income generated in Israel.

    

7. Exemption on income tax filings

    

   According to the reform, during the first 10 year period (starting from the arrival/returning date) new immigrants and 'senior returning residents' are exempt from serving tax reports to the Israeli Tax Authorities if foreign income or foreign assets are concerned.