Over 29,000 new immigrants ("olim") arrived in Israel in 2018. The extensive tax exemptions for olim in relation to overseas income for a period of 10 years are surely sweeteners to help with the move. Relocation is a stressful time but also a perfect opportunity to review your tax and financial affairs and plan ahead to ensure that if possible, you benefit from this unique opportunity.
The benefits are available to new residents; returning residents who lived abroad for at least 10 years from their departure from Israel; those who lived abroad for 5 years and returned to Israel between 2007 and 2009; and foreign residents at 1 January 2007. It should be noted that the concept of a "first time resident" for fiscal purposes applies to any person who was not previously an Israeli resident, and not only to those who are eligible to "make aliyah" under the Israeli "Law of Return". For the purpose of this article, we refer to all these categories by the term "olim". These tax benefits are available to olim from the date of residence in Israel (and not necessarily the date of formal aliyah).
What is the tax benefit?
Israeli tax residents are taxed in Israel on their worldwide income, subject to tax treaties. Olim are eligible for a 10-year tax exemption with respect to all foreign-sourced income such as investment income, pension income, rental income and the sale of foreign assets. This means that olim are exempted from paying taxes on income earned abroad. In fact, olim are even exempted from reporting the income.
There are those who argue that these benefits may portray Israel as a tax haven and as a result Israel is unable to exchange information fully with other jurisdictions. The OECD and other international bodies have criticized the exemption and often put pressure on the Israel Tax Authority (ITA) to revoke the exemption from reporting income earned abroad. In fact, the ITA submitted drafts on two occasions for revoking this exemption but both attempts were rejected.
Whilst the tax benefits for olim are unique, we note that other jurisdictions have similar tax benefits for certain categories of residents. For example, the UK offers a preferential tax regime for those who are UK resident but non-UK domiciled. This is a very complex area of UK tax law, but one of the consequences is that it makes the UK an attractive place of residence for non-UK domiciled individuals from a tax perspective.
Confusion and clarification
There is often some confusion as to how and when the benefits can be used for employees, those who are self-employed ("osek patur" or "osek morshe") and those with companies incorporated outside of Israel. For example, the term "offshore income" may be mistakenly understood to include income which is received offshore. Income generated from services provided whilst in Israel is not exempted from Israeli income tax despite payments being received offshore. To determine whether the income is "offshore income," it is relevant where the taxpayer is physically present when providing their services.
The situation can become more complicated where services are provided partly in Israel and partly outside of Israel. In this day and age, travel and having clients in different countries is the norm. A laptop and a phone are often the key ingredients for work rather than a fixed office. If a taxpayer has "mixed" income, they are required to file an annual tax return in Israel reflecting the ‘Israeli part’ of their income and pay the Israeli income tax on this element accordingly.
The ITA long ago clarified that such allocation should be based on the number of business days that the taxpayer was physically absent from Israel. A recent tax ruling published by the ITA seeks to clarify the application of this methodology by stating that taxpayers must calculate their "Israeli income" by pro-rating their annual income based on the number of "business days" spent in Israel compared with the total of "business days" in that year. This is a slightly different methodology from the way the ITA previously specified how Israeli business days should be determined.
The ruling further sets and clarifies a "de minimis" rule whereby if taxpayers spend less than 60 business days outside of Israel during the fiscal year, their entire income is taxed as Israeli sourced income. Although this "de minimis" rule is not part of the legislation, it represents the ITA's position and is slightly different from their original position and therefore should be taken into consideration.
However, for some taxpayers the above methodology of counting "business days" may not truly reflect their working position. A taxpayer may therefore choose to allocate his income based on a different method, in which case he is required to substantiate such allocation and provide any relevant data the ITA may ask for. Allocation issues may also arise with respect to other forms of employee compensations such as stock options issued prior to relocation and so forth. As always, taxpayers should be aware of these potential issues, retain relevant documentation and always seek professional advice.
Other tax considerations
Taxpayers must also consider the tax implications for the income generated in their country of origin. For example, in the UK, they may need to file a UK tax return to declare the UK-sourced income. Non-UK residents don’t usually pay tax on the sale of assets apart from the sale of UK residential property. Taxpayers must also take care to ensure they don’t inadvertently become UK resident. Whether an individual is UK tax resident is subject to the UK statutory residency test which is based on the number of days present in the UK and the number of ‘ties’ they have to the UK. This analysis can be complex. Olim who relocated from the US or those who are US citizens/green-card holders must also be aware of their US reporting duties and other US tax and compliance aspects as a result of their status in the US. This too can be complex.
Financial affairs, tax affairs and personal affairs are all factors to be weighed up when considering moving to Israel. As stated at the outset, we recommend that you review your affairs and take professional advice prior to moving to ensure that you take all the necessary steps to maximize and make use of the tax benefits available to olim.
Claire Shelemay ACA is the founder and CEO of CrownStone Consulting Ltd - a UK tax boutique in Tel Aviv. Lilach Asherov Adv. TEP is the owner of an Israeli legal firm specializing in Israeli and international tax issues.
Published by Globes, Israel business news - en.globes.co.il - on February 4, 2019
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