New immigrants and returning citizens are entitled to various benefits granted by the Israeli Income Tax Ordinance, these benefits were extended in 2007, to pay tribute to Israel’s 60th anniversary. The benefits provide incentives for Jews to make Aliyah and for former Israeli residents to return to Israel. Special benefits also exist for returning scientists and entrepreneurs.
Before breaking down the various benefits, let’s first examine who is entitled to enjoy them?
“Oleh” – New immigrant (“Olim” in plural).
“Senior Returning Resident” – Individuals who returned to Israel after living continuously outside of Israel, and have been considered a non-Israeli-resident for at least 10 years. These individuals will be considered as “Oleh”.
“A Returning Resident” – Individuals who returned to Israel after living continuously outside of Israel, and have been considered a non-Israeli-resident for at least 6 years.
What are the residence rules?
For Israeli tax purposes, the key principle for being an Israeli resident is the Center of Life Test. This takes into account all of the individual’s connections to Israel, such as family, economics, and social connections. In addition to the above-mentioned qualitative criteria, the principle takes into account the physical presence test, according to which an Israeli resident is an individual who either:
1. Spent at least 183 days in Israel during a tax year.
2. Spent 30 days or more in Israel during the specific tax year, and at least 425 days during that tax year and the two tax years preceding it, combined.
1. The main tax benefits for new immigrants (“Oleh”) and Senior Returning Residents:
1.1 10 years exemption (“The exemption period”) from tax on all foreign income source (i.e., income derived outside of Israel) including passive incomes – dividend, interest, rental income, etc.
1.2 Exemption from tax on capital gains generated from sale of assets outside of Israel for ten years. This exemption also includes capital gains on assets purchased after returning to Israel. (Note that if the asset is sold after the expiration of the ten years period, a relative exemption will be applied).
1.3 All Israeli residents are entitled to 2 credit points (reduction of 438 NIS per month from the tax liability), as well as an additional, 0.25 points for a working man and 0.75 points for a working woman. Working Olim and Senior returning residents, are entitled to additional points on top of that, for a period of three and a half years following their Aliyah (Can be used for 3.5 years from the date of return to Israel).
1.4 For Israeli tax purpose, a foreign company controlled by Israeli resident, is considered as an Israeli company- (i.e. “Controlled Foreign Corporation”) and is subject to Israeli taxation. Foreign companies held and owned by “Olim” and Senior returning residents, will not be considered as an Israeli company for taxation purposes for a period of ten years, and thus will not be subject to Israeli taxes, during the exemption period.
1.5 Acquisition of real estate in Israel is subject to Purchase Tax; Israeli citizens acquiring their first residential property are entitled to Purchase Tax brackets of 0%, 3.5%, 5%, 8%, and 10%, depending on the purchase price (“Ordinary Brackets”). Olim are entitled to special Purchase Tax brackets – 0.5% and 5%, on their first apartment (subject to personally living in it); and to Ordinary Brackets on their second apartment, up to seven years after their Aliyah date. The fact that Ordinary Brackets begin at a lower tax rate than the special Purchase Tax brackets for Olim (0% as opposed to 0.5%) can make these benefits a little misleading, but with careful tax planning an Oleh can enjoy minimal Purchase Tax rates on two apartments.
2. The tax benefits for regular returning resident:
The tax relief applies only to assets purchased while the individuals did not reside in Israel, and before their return.
2.1 A five-year exemption period on passive income generated from such assets.
2.2 A five-year exemption period on interest and dividend income from “Beneficiary Securities”. “Beneficiary Securities” are defined as Israeli securities purchased, by a regular returning resident, as part of their passive investment portfolio (for example, Mutual Funds which include Israeli securities).
2.3 A ten-year exemption on capital gains from assets located abroad, which were held by the individual before returning to Israel.
Optional track for adapting:
Please note that a one-year adjustment period, starting from the date of arrival to Israel is granted upon request. This allows the individual to choose not to be considered as an Israeli resident for tax purposes during this one-year period. The request for the adjustment year must be submitted within 90 days from the date of arrival to Israel.
This document is intended to provide general information only;
For further information, please contact Dolev Chelwicki >> DolevC@Raveh-Ravid.co.il