The media announced yesterday that Arnon Milchan, one of the owners of Channel 10, is returning to Israel, and that he will benefit from the extraordinary tax breaks that the government approved in September 2008 to new immigrants and returning residents.
Milchan is not the only new immigrant and returning resident eligible for the tax breaks. The benefits target people that the government wants to encourage to come: tycoons, such as Milchan, Israeli high-tech entrepreneurs who emigrated, and the owners of foreign assets and companies.
The tax breaks include a ten-year exemption on income taxes and the filing of returns on income from foreign assets. The exemption applies to all sources of foreign income, including dividends, capital gains, interest payments, rental income, business revenue, and professional fees.
Amendment 168 to the Income Tax Code, passed in September 2008, awards astounding tax breaks to new immigrants and returning residents, particularly those with foreign assets and income as they will be wholly exempt from Israeli taxes for 5-10 years. Not to mention the exemption on filing tax returns on this income.
The legislation effectively turned Israel into one of the world's best tax shelters.
The amendment distinguishes between a "senior returning resident", an Israeli citizen who has resided abroad for at least ten years, and a "regular returning resident", an Israeli citizen who has resided continuously abroad for at least six years; a "senior returning resident" is effectively considered as a new immigrant.
A "senior returning resident" gets a ten-year tax exemption, while a "regular returning resident" gets a five-year exemption. There is a loophole: the amendment stipulates that an Israeli citizen who has resided abroad for five years at the end of 2009 will be considered a "veteran returning resident". As a result, an Israeli citizen who has resided abroad for at least five years and is considering returning home, had better pack his bags, so that they will be eligible for the ten-year exemption. Wait until January, and the tax exemption will be halved.
Foreign companies owned by new immigrants will not be considered as a company owned and managed from Israel during the exemption period and will not be considered as an "Israeli resident" for tax purposes. Furthermore, in order to determine a "foreign professional company" and a foreign controlled company, the share of the new immigrant or returning resident in that company will not be considered during the exemption period.
In addition, the Economic Arrangement Law (5769-2009) resulted in a new ordinance, which provides for an income tax exemption and filing for an addition ten years (20 years altogether) provided that the beneficiary will make substantial investment in Israel within two years of arrival in the country.
The legislature is constantly seeking ways to ease the tax burden. In this instance, the easing is for wealthy new immigrants and returning residents who get substantial foreign income.
The expectation is that these new immigrants and returning residents will use the proceeds from the tax break to invest in Israel and earn income domestically. This domestic income will be liable to tax. However, there is no certainty that this will actually happen. Needless to say, the amendment does not mandate any such investment.
Moreover, after the ten-year exemption expires, these new immigrants and returning residents are liable to pack up and move on elsewhere. If they leave, Israel will have lost both quality people and the money. But if they stay and invest during the exemption period and afterwards, the Israeli economy will benefit. Of course, no one can promise that this will happen.
Dr. Avi Nov is an attorney specializing in Israeli and international taxation, and a lecturer in the School of Management's law and business departments. E-mail: firstname.lastname@example.org
Published by Globes [online], Israel business news - www.globes-online.com - on October 13, 2009
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