In 2008, the "Milchan Law" was passed, whereby new immigrants and veteran returning residents were granted a tax and reporting exemption on their income abroad for 10 years from the date of their immigration or return to Israel. In recent years we have seen various attempts by the Israel Tax Authority to minimize and even abolish these benefits.
While the minimization of these benefits could increase transparency and supervision, it harms those new immigrants and returning residents needed and lacking in our society, including doctors and high-tech professionals who have left Israel.
The brain drain out of Israel causes significant economic damage, since the investment in subsidizing years of education is not realized in Israel. In addition, there is a shortage of experienced professionals in professions vital for the economy. Israel is trying to make it easier for the returnees with the help of the Innovation Authority's "National Program for Academic Restitution," the goal of which is to help find work for them when returning to Israel.
However, the Israel Tax Authority seems to have other intentions. Recently, in the framework of the "Reportable Positions" for 2018, they published two tax-related positions that require reporting, reducing the possibility of offsetting losses incurred by a new immigrant or veteran returning resident during the 10-year tax exemption period. As a result, a new immigrant or veteran returning resident will pay more tax, because they will not be able to offset certain losses that, according to a certain approach, could have been offset before.
In addition, in a recent tax ruling published by the Israel Tax Authority, it was determined that the taxation of employee options of new immigrants and returning residents will be based on a strict calculation, if they move to Israel and hold employee options granted to them while they were working abroad.
The positions of the Israel Tax Authority do not concern only the immigrants themselves, but also the companies in which they are employed. There has been a trend in recent years to impose tax on the activity of foreign companies, for which the new immigrant carries out business activities in Israel. These policies may harm the motivation of international companies to employ workers in Israel, as well as the motivation of Israeli employees of foreign companies to return to Israel.
Minimization of the reporting exemption may lead to increased transparency and reporting requirements. In the framework of the "Arrangements Law" for 2015-2016 it was proposed to cancel the exemption from reporting for new immigrants and returning residents on assets and income derived outside of Israel. However, this attempt did not succeed and for the time being the exemption remains intact. It should be noted that an exemption from such reporting raises pressures from international associations such as the OECD, as it contradicts the global trend of cross-country transparency.
The implications of minimizing benefits under the Milchan Law have two facets. There will be greater supervision and transparency of the income and assets of immigrants, returning residents and multinational companies owned and/or operated by them. In addition, the limited case law has enabled those entitled to these benefits to make convenient tax calculations for mixed activity, i.e. activity carried out both in Israel and abroad, and for intangible assets created outside of Israel for those eligible for tax relief. The minimization of these benefits could therefore lead to potential immigrants (and their capital) remaining outside Israel.
Taking into account the positions of the Israeli Tax Authority, cost-benefit considerations must be applied in order to reduce the economic damage caused by the brain drain. The Israeli Tax Authority must decide which benefits will be retained and which should be amended, in order to enable transparency and supervision, without harming national objectives. At the same time, the government and the various parties, given the upcoming elections, must act to adjust the positions of the Israeli Tax Authority with respect to the campaign to bring Israeli intellect back to Israel.
Eli Alice, CPA (Isr.), MBA, is a partner and Head of International Tax Department, and Michael Goldberg, CPA (Isr.), MBA, is Expatriate Tax Manager, at BDO Israel.
Published by Globes, Israel business news - en.globes.co.il - on March 18, 2019
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