Nefesh BNefesh

Guest Contributor: Philip Stein, CPA

On January 18th, the Israeli Tax Authorities released a 21 page document clarifying its position on tax status and accompanying exemptions for Olim Chadashim and veteran returning residents. The documents review the changes in the law that affected new immigrants who moved to Israel after December 31, 2006. 

One of the most interesting sections of the document is the Tax Authorities’ views regarding Israel's right to tax active income generated after the new Oleh moves to Israel. The new law states that active income generated outside of Israel for services performed outside of Israel is generally exempt from Israeli tax for 10 years. The law also reiterated that income generated from work performed in Israel even if paid from outside of Israel is subject to Israeli tax and does not fall under the exemption. Two examples can easily illustrate this distinction. 

David is a surgeon in a hospital in St. Louis, Missouri.  He made Aliyah on January 1, 2009 and commutes to perform operations every 6 weeks in St. Louis. David clearly is exempt for 10 years under the new rules.

Jerry moved to Israel on July 15, 2008 and works for a large New York bank maintaining a data base of clients with large balances. He performs all of the services from his home office in Katzrin but his salary continues to be deposited into his US bank account every month. Jerry is subject to full Israeli tax since the law considers all of the income to be generated in Israel.

This recent document is, however, the first time the Israeli Tax Authorities address "mixed" income that is earned by a new Oleh. Mixed income is income that is partially generated in Israel and partially outside of Israel. In general, Israel says that a new Oleh needs to allocate on a proportional basis his work done outside of Israel based on a fraction of days worked abroad over total work days in the year. Israel says that vacation days and personal days should be taken out of the denominator. Nonetheless, Israel does state that if the Oleh has another method that more accurately allocates the income, then the Oleh can use that method. However regarding either method (the default "days" method or special method) the taxpayer has to keep accurate records justifying their position.

In addition, Israel clearly states that this exemption does not apply to income generated abroad if paid by an Israeli employer. Perhaps the most interesting part of the document on this issue is the concept of "ikar and tafel" that is stated. "Ikar" means the principal and the "tafel" means secondary or insignificant. In other words Israel says that even if there is some income generated outside of Israel (the tafel), but it is the result of the main activity (the Ikar) taking place in Israel, then the activity/income that takes place abroad will not be eligible for the income tax exemption.  This would seem to be an aggressive interpretation by the Israeli tax authorities and will certainly be challenged. 

Nonetheless, the new clarifications give new Olim and returning residents a chance to understand the Israeli Tax Authorities’ mindset and therefore provide better opportunities to fine-tune their own tax planning regarding these issues.