Immigrating to Israel – an Opportunity soon to be missed?

01.09.2019 | ZAG-S&W

By Boaz Feinberg, ADV. Partner and head of the Tax and Financial Regulation Department, ZAG-SW Law Offices

It is presumed that most people who have been contemplating on making Aliyah to Israel, are probably familiar with the special tax treatment Israel is offering to new immigrants.

To those of you who are not familiar, the amendment to the Israeli Tax Ordinance which was introduced in the year 2008 and is applicable since January 2007 applies to new immigrants and to senior returning residents (10 consecutive years of being foreign residents) and includes significant tax benefits under the presumption, that it will promote high net worth individuals to move capital into Israel and to have themselves immigrate to Israel.

Under the tax treatment, a new immigrant is fully exempt from Israeli income tax and capital gain tax on any income that was derived outside of Israel for a duration of 10 years commencing on the day they arrived to Israel. Moreover, the treatment exempts any such person from reporting any of its foreign income or assets for the same duration.

The exemption covers all types of income, both passive and active, and includes, Inter alia, dividend income paid by a foreign company, interest income and royalties paid by a foreign payer, rental income and capital gain from real estate situated abroad, capital gain from the sale of shares of a foreign company, income generated from a business activity conducted abroad and income received for employment and/or services conducted abroad.

However, there has been increasing disapproval of the special tax treatment given to immigrants and senior returning residents, mainly by heads of the Tax Authorities, stipulating that it is not clear whether the special tax treatment has in fact brought about an increase in transfer of capital and business from abroad into Israel, or that in general, has brought about an increase in immigration by high net worth individuals. A larger discontent has been expressed with regard to the reporting exemption, which, in the view of the Authorities, is incompatible with recent changes made by the OECD, and Israel among them, with regard to transparency and share and transfer of financial information between countries in order to combat tax evasion. Just a few days ago, the Deputy Director General of the ITA revealed that it has recently formed a special “Reform Committee” that is currently re-examining the special tax treatment and it seems very probable that any such reform would repeal the reporting exemption, and even may reduce some of the tax benefits that are now in place.

I should also be noted, that the tax authorities are about to issue a proposed amendment to the Tax Ordinance and specifically to the Residency test provisions, which would provide for a clearer test based not only on center of life test, but also based on number of days spent in Israel in a tax year. The new test may require to reexamine existing structures with those who spend time in Israel, but claim their center of life is elsewhere.

The upcoming elections in Israel set to take place in mid-September 2019, will determine, among other things, who would be in charge of the Finance Ministry, and whether the heads of the Tax Authorities would be able to persuade him to make amendments to the Tax Ordinance, which would result in a change for the worse in the existing tax treatment to immigrants.