Some advice for those having just made aliya.
There have been a few changes to the Israeli tax rules for new immigrants and returning residents. The changes relate only to Israeli-source income.
The basic rule is unchanged. If you become a new Israeli resident, the country grants you a 10-year tax holiday (exemption) – BUT only for non-Israeli-source income and capital gains.
This applies to new residents who became resident on or after January 1, 2007. This also applies to senior returning residents who resume Israeli residency after residing abroad at least 10 years.
Exempt income and related assets do not need to be reported to the Israel Tax Authority for the same 10 years. All types of income and capital gains are covered by the exemption if they are derived from non-Israeli sources, such as income from salary, business, pensions, investments, etc. However, if you work in Israel for anyone at all, you generate Israeli-source income and you will pay Israeli tax from day one.
New tax credit for returnees
The recently reported proposals regarding credit points have just been enacted. In 2011 each credit point reduces the tax bill by NIS 209 per month. In the case of a married working couple, the husband usually receives 2.25 credit points and the wife usually receives 2.75 points.
But olim get more in their first 3.5 years in Israel: three more credit points for 18 months, followed by two more credit points for 12 months, followed by one extra credit point for 12 months.
Until recently, the extra credit points only applied to someone who holds a Teudat Oleh (immigration certificate) under the Law of Return, or someone eligible for this with a temporary resident‘s visa.
Now ‘‘returning residents‘‘ will also get the extra credit points according to Amendment 181 to the Income Tax Ordinance, commencing January 1, 2011. This applies to people who return to reside in Israel between May 16, 2010, and September 30, 2012, after living abroad six years continuously. This can be confirmed in a Returning Resident Certificate from the Immigration Absorption Ministry.
Comment: Unfortunately, this tax saving for living and working in Israel does not seem big enough to encourage people to move to Israel.
Exemption for ‘‘Privileged Residents‘‘
The newly enacted Economic Policy for 2011 and 2012 (Legislative Amendments) Law includes a new exemption for people classified as ‘‘Privileged Resident‘‘. This refers to someone who first becomes an Israeli resident in the years 2011-2015, or who returns to reside in Israel in those years after residing outside Israel six consecutive years.
If a non-Israeli resident is invited to live and work at a recognized Israeli academic institution or hospital, that individual will now be exempt from Israeli tax on royalty income received from an ‘‘application company‘‘ belonging to that institution for five years starting in the year such income is first received. This applies commencing January 1, 2011, subject to various conditions, as discussed below.
An application company is a subsidiary of an academic institution or hospital that engages in the development of products discovered or developed by the institution or hospital. The individual must enter into an agreement with the applications company within two years after the end of the year in which he/she moved or returned to live in Israel. And tax avoidance must not be a motive! The agreement should relate to the development of a product in consideration for, among other things, royalties for the usage of the product.
The product should be a tangible or intangible derived from research and development according to a plan approved by the Chief Scientist‘s Office under the Industrial R&D Encouragement Law.
Note that the above exemption only applies to the portion of royalties paid by the applications company out of amounts received from a foreign resident that does not have a ‘‘permanent establishment‘‘ in Israel. A permanent establishment is not defined here, but it is usually taken to mean a fixed place of business.
* Comment: Unfortunately, this looks like an exemption for a privileged few.
A step backwards
The Israeli corporate tax break was amended on Jan 1st 2011 in Amendment 68 of the Law for the Encouragement of Capital Investments. The law specifies national economic criteria that the government and Israeli industry should bear in mind. Previously, the absorption of new immigrants was an objective under this law, but this is no longer an objective following the amendment.
As always, consult experienced tax advisers in each country at an early stage in specific cases.
Leon Harris is a certified public accountant and tax specialist at Harris Consulting & Tax Ltd.