Taxation of New Immigrants Rules in Israel

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Thank you to Avraham Deutsch’s office for authoring this article.

Taxation of New Immigrants Rules in Israel:

New immigrants and returning citizens are entitled to various benefits granted by the Israeli Income Tax Ordinance. These benefits were extended in 2008 in commemoration of Israel’s 60th anniversary to try further to provide incentives for Jews to make Aliyah. A returning citizen is someone who has either resided overseas for at least 10 years; or resided overseas for 5 years and returned to Israel during 2007-2009; or were considered foreign residents on January 1, 2007. Special benefits also exist for returning scientists, and entrepreneurs. The law was introduced in order to persuade many Israelis, who had made yerida (left the state of Israel) to return. These tax benefits are offered to new immigrants who made Aliyah after January 1, 2007 as follows:

New tax status for returning residents
A new tax status – “a returning resident classified as a new immigrant for tax purposes”, will expand tax benefits given to returning residents. The new status will be given to individuals who:
– Resided overseas for at least 10 years from their departure from Israel
– Resided overseas for 5 years and returned to Israel during 2007-2009
– Were considered foreign residents on January 1st 2007

Tax exemptions for companies managed by returning residents or new immigrants
Returning residents or new immigrants who own and manage a foreign company that is active abroad, or own its shares,will no longer be automatically subject to Israeli taxes. Thus, the company will be generally able to continue generating tax-free revenues, so long as these revenues are not generated in Israel.

Exemption from reporting earnings from abroad
Returning residents or new immigrants, and the foreign companies that are under their direction, are not obligated to report earnings that benefit from exemption. Only income from activities in Israel and from Israeli investments and assets that are generated following Aliyah or returning to the country is subject to reporting and taxation according to regular tax laws.

Expansion of tax benefits for a returning citizen and new immigrant
Returning residents and new immigrants will be exempt from taxes for ten years on income generated outside Israel. This covers all income, active or passive, such as interest, dividends, pensions, royalties and rental of assets. All income, whether from the realization of assets and investments abroad or from regular income abroad, is tax exempt.

Tax benefits for new immigrant
New immigrants will enjoy tax deductions which help reduce overall income tax based on the following division:
– During their first 18 month- 3 tax credit points.
– During the following year- 2 points.
– During the third year- 1 point.

Tax benefits for new immigrants on interest from foreign currency deposits
New Immigrants are entitled to an exemption from paying tax on interest on foreign currency deposits for 20 years, so long as the source of those deposits is capital they possessed prior to their immigration, and which was deposited in an Israeli banking institution.

An adjustment year
New immigrants and returning residents can fill out an application form for an adjustment year. During the year they will not be considered Israeli citizens for tax purposes. At the end of the year, If they decide to stay in Israel they will enjoy all the benefits that are part of the new tax reform. If they decide to stay in Israel, the period of residency will start retroactively from the first date you arrive in Israel.

Summarization of the tax benefits before and after the reform:

Type of Benefit  Past Status Present Status
 New Tax Status – a returning resident classified as a new immigrant for tax purposes  Did not exist  A new tax status expanding tax benefits given to returning residents and making them equivalent to the tax benefits given to new immigrants. The new status will be given to individuals who resided overseas for at least 10 years from the date they left Israel.
 Exemption on passive income (interests, dividends, rentals etc.) for new immigrants and returning residents  Granted to new immigrants only for a 5-year period  Granted for a 10-year period for new immigrants and returning residents. The exemption includes income from professional work and salaries.
 Exemption on income from professional work and salaries  Granted for four years only to new immigrants who owned a business 5 years prior to their Aliyah
 Companies managed by new immigrants  Did not exist  Exemption from tax on income from companies that activate abroad and are managed by a new immigrant or returning resident, or else they own part of its shares.
 Exemption from reporting  Limited exemption  Full exemption on reporting exempted income.
 Adjustment track for tax purposes  Did not exist  1year adjustment period from the date of arrival to Israel.

Alan (Avraham) Deutsch is a CPA, with over 30 years’ experience. Alan and his associates specialize in income tax planning and compliance as well as in investment consulting. Alan has five office locations and can be reached at 02-999-2104, 03-527-3254, 09-746-0623 or 052-274-9999, or you can e-mail him at alan@ardcpa.com. Please visit his website at www.ardcpa.com for more information.