The draft Economic Arrangements Bill for 2023-2024 contains a provision that could affect taxation of new immigrants to Israel and returning residents on cryptocurrency profits. The relevant section states that the minister of finance will have the power to set "rules concerning the classification of the location of a digital asset in accordance with the residence of the owner of the digital asset and in accordance with the connection of the asset to Israel."
In effect, the Israel Tax Authority and the Ministry of Finance thereby circumvent the "Milchan law" under which new immigrants and returning residents are entitled to a ten-year exemption from taxation on their overseas assets and from the requirement to report those assets. If the location of digital assets is defined according to the residence of the owner, income from such assets will be considered income arising in Israel, and will be liable to tax.
The "Milchan law" was enacted in 2008 to encourage Jewish money to move to Israel. In the period 2009-2010, several wealthy Israelis living overseas did indeed come to Israel, among them Arnon Milchan, Sammy Ofer, and Shai Agassi.
International taxation law expert Adv. Itay Bracha, managing partner at Bracha & Co., says, "Many new immigrants who deal in cryptocurrency before coming to Israel trade overseas with the intention of utilizing the exemption that they are legally entitled to. A change in the legislation concerning cryptocurrency in this respect will harm new immigrants’ rights and will lead to people deciding not to come to Israel."
Over the years, through the Economic Arrangements Bill that accompanies the annual state budget, Tax Authority officials have tried to cancel the reporting exemption for overseas income and assets of new immigrants and returning residents, but without success. The current Economic Arrangements Bill does not contain such a provision, but, as mentioned, as far as cryptocurrencies are concerned, the Tax Authority seems to have found a way around the exemption.
The Israel Tax Authority stated in response: "The report on regulation of digital assets by the Chief Economist’s Department in November 2022 recommends determining in primary legislation the classification of the location of a digital asset in accordance with the residence of the owner of the digital asset at the time that it is acquired, except for a digital asset that reflects the value of an asset or service in Israel, which should be classified as located in Israel.
"Insofar as this recommendation is implemented, the implication is that new immigrants and returning residents will be entitled to a tax exemption for ten years from the day they become resident in Israel for capital gains from the sale of digital assets bought before the date of their immigration or return to Israel, with the exception of assets that reflect the value of an asset or service in Israel, and subject to the provisions of the Income Tax Ordinance."
The approach of the Israel Tax Authority does not represent a conceptual change, but confirmation of its longstanding position that assets bought after immigration or return to Israel are liable to tax.
The problem begins, however, with digital assets managed overseas. "Most people who make money on cryptocurrencies nowadays don’t ‘sit on the money’ as they did in the past," Bracha explains. "Anyone who wants to make money in crypto today has to trade in it, selling and buying cryptocurrency all the time. New immigrants do not trade in cryptocurrency in Israel. They use people overseas who do it for them, but now the Tax Authority is saying to them ‘You’ll pay tax.’"
Published by Globes, Israel business news - en.globes.co.il - on February 14, 2023.
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