Nefesh BNefesh

Guest Contributors: Chaim Wigoda and Leor Nouman

Moving around the corner can be difficult and stressful, but it is no match for moving to a new country; particularly a country with a different climate, culture and primary language.

The Israeli government now realizes that there are countless challenges facing the average North American oleh and they have decided to take an active role in improving the situation. The government wants people to make aliyah and it wants former residents to return and live in Israel. The number one reason for an unsuccessful aliyah is because of the financial strains placed upon the oleh.

To battle the financial strains, the Knesset ratified a new law on September 16, 2008. Back-dated to 2007, olim and returning residents (that lived abroad more than 10 consecutive years) now have several new entitlements available to them.

First of all, the new oleh or returning resident is exempt from both passive and active income taxes, for such income earned outside of Israel. This exemption now extends to ten years -- at least double the exemption period offered to those that made aliyah prior to January 1, 2007. Furthermore, the oleh/returning resident is not required to even report such income for the full ten years. 

Practically speaking, the government is offering olim/returning residents a similar status to what the UK calls Non-Domicile status. The main components of the new legislation include: clarifying the resident test rules; granting a tax exemption for a period of 10 years for all types of foreign income; granting an exemption from filing tax reports for 10 years; and providing retroactive application from 2007.

It is important to note that the source of income many not be clear in some cases. Sending emails, making and receiving telephone calls, monitoring a distant business via computer in Israel, and other factors, may impact the determination of source.

The Israeli tax authorities may argue that in many cases the income can be deemed derived, in whole or in part, from Israel and in such cases, the exemptions do not apply. 

It is always prudent to complete a comprehensive tax plan prior to making aliyah or becoming a returning resident.

According to the new legislation, residency conditions will now include a definition of what constitutes a foreign resident and in turn, better determines the date on which an individual was deemed to be a foreign resident.

To be considered a foreign resident, one must have his center of life not in Israel. Alternatively a person is deemed a foreign resident if he spent at least 183 days outside of Israel during two tax years and then that person's center of life during an additional two years was not in Israel. Unlike the old rules, one may benefit from the tax exemption whether they had an asset relating to the income abroad prior to becoming an Israeli resident or not. 

To further simplify the decision, a new oleh may choose not to be regarded as an Israeli resident for his or her first year in Israel, commencing from the date of arrival ("the Adjustment Period"). Should that person decide to stay and make aliyah after the year, the Adjustment Period will be counted as the first year of the ten.

In order to qualify for the Adjustment Period, one must advise the tax authorities within 90 days of his or her arrival. The Adjustment Period may help in tax planning because during this period one is still regarded as a foreign resident. For Returning Residents this status may be more complicated. Careful planning is required in either case. 

Do you own a company operating outside of Israel? Previously, according to the Israel Tax Office (ITO), even if a company was incorporated under foreign law, but managed and controlled by individuals who were Israeli residents for tax purposes, the tax authorities would regard that company as an Israeli resident as well. 

However, the new legislation has changed that rule. Now, if the foreign company is controlled by a new oleh or by a returning resident then, for a period of 10 years commencing from the date on which the new oleh became an Israeli resident for tax purposes, the company will still be regarded as a foreign resident company for tax purposes. 

Despite these new tax/financial incentives, it is important to carefully plan your move. Without proper planning, the new oleh/returning resident could be subject to exit taxes and ongoing withholding/income taxes from the country of origin. These taxes could go a long way to neutralize the benefits of the Israeli tax holiday.

Furthermore, one has to properly structure one’s affairs in order to properly fit into the new Israeli rules and enjoy 10 years of tax holiday.

It is important to note that this is still a very complicated part of tax law and the tax authorities have the final word on what is deemed as derived in whole or part from Israel or abroad. Therefore, it is recommended that people undertake careful tax planning prior to making aliyah.

Thanks to Chaim Wigoda, Managing Director of HCC International Services Ltd., and Leor Nouman, Partner and Head of Tax at S. Horowitz & Co., for preparing this article. S. Horowitz & Co. is one of Israel's leading full-service law firms which offers legal services on international and Israeli tax matters for olim. HCC International Services Ltd. offers the skills of professionals who practiced international financial and tax planning for more than 20 years. Its focus is to help ensure that the oleh/returning resident is free of taxes emanating from the country of origin, in order to fully capitalize on the new Israeli exemptions.

leorn@s-horowitz.co.il.
hcc31@hallmarkcc.com