Israeli Tax Holiday for Immigrants in Israel
Long ago, all Israel had to offer was oranges. These days, there is money to be made and a homeland to live in.
Tax breaks for olim
When you become a new Israeli resident, Israel grants you a 10-year tax holiday (exemption) regarding all non-Israeli source income and capital gains. If you left Israel and are coming back, you still get the tax holiday if you lived outside Israel for five to 10 years.
Exempt income and related assets do not need to be reported to the Israel Tax Authority.
Unfortunately, no exemption applies to work done in Israel, even if it is for a company located outside Israel. But if you travel around the globe, income relating to days worked abroad will be eligible for the 10-year exemption.
You may elect on Form 1130 within 90 days after arrival in Israel to remain a foreign resident for Israeli tax purposes in your first year in Israel.
Your date of arrival is the earliest of the following:
Date in the Immigration Absorption Ministry new/returning resident certificate;
When you have a permanent home in Israel available for personal use;
When your family (spouse, children) have a permanent home in Israel After 183 days presence in Israel.
How to show the tax authorities in your old country that you have actually left
You can invoke special ‘‘tiebreaker‘‘ rules in your old country‘s tax treaty with Israel. A tax treaty trumps the laws of each country, and the tiebreaker rules prevent dual residency. For example, Israel‘s tax treaties with the US and South Africa state that if you are an oleh and your center of living is in Israel, you are deemed to be just an Israeli resident.
What happens with cash
If you place cash on a foreign-currency time deposit at a bank branch in Israel, known as ‘‘Patach‘‘ (Pikadon Toshav Chutz), Israel will not tax the interest for 20 years if you are a new resident, or for five years if you are a returning resident. If you prefer to use a non-Israeli bank deposit, the 10-year exemption is available.
When we reach 120
Israel does not impose tax on death, but if you invest in the United States, watch out for US estate tax of 18 percent to 45%, and if you invest in the UK, there is inheritance tax of 40%.
These taxes may be avoidable with an appropriate holding company structure: offshore, or even an Israeli holding company.
What about trusts
If you are the settlor of a trust and move to Israel, the trust will get the same 10-year tax holiday for non-Israeli source income and gains as you. But additional tax-planning opportunities often exist for families with relatives scattered around the world; please take specific advice.
Regular Israeli tax rates
Israeli income-tax rates, when they apply, range from 10% to 46%. Dividends, interest and capital gains are taxed at only 20% if you hold under 10% of the investee entity, otherwise higher rates apply.
Institute contributions on the first NIS 38,415 per month are at the following rates:
Freelancers 9.82%-16.23% (52% tax deductible)
Not working 9.61%-12%.
There are no NII fees for most dividends and capital gains.
Companies are taxed at 26%, but various tax breaks and government grants are available for industry, technology, tourism and certain rental properties.
If you expect to make more profit in Israel than you need to live on, consider forming a regular private Israeli company. It will pay 26% tax; you can defer further tax until you receive take a bonus or dividend, which could be years later.
If you want to invest in Israeli securities (not property related), an interesting capital-gains tax exemption applies to foreign investors, including those who subsequently make aliya.
Claim the 10-year tax holiday. In year 11, you should not pay more tax in Israel than you would have in the country of payment of the pension. Check the relevant tax treaty. For example, the South Africa tax treaty generally exempts in South Africa pensions paid to people resident in Israel. And Israel will also exempt the pension for the first 10 years – a double exemption! There is no official guidance yet regarding lump-sum funds, such as a US IRA or Canadian RRSP or a UK SIPP where applicable.
Israeli-exempt onshore structure
Israel now offers the ‘‘Trust Owned Vehicle‘‘ (TOV!). This is a regular Israeli holding or trading company owned by a trust.
If the settlor or the beneficiaries are non-Israeli residents, Israel will not tax non-Israeli source income and gains.
As always, consult experienced professional advisers in each country at an early stage in specific cases.
Leon Harris is an international tax specialist.