New residents and some returning residents get a 10-year tax exemption in Israel – true or false?
New residents and some returning residents get a 10-year tax exemption in Israel – true or false? Unfortunately, that‘s partly true, partly false. So let‘s review the general rule, the exceptions, the solutions and some new developments.
When are you exempt?
When you become a new Israeli resident, the country grants you a 10-year tax holiday (exemption) regarding all non-Israeli sourced income and capital gains. This applies to new residents who become 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 (see also below).
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.
The Israeli government does not have worldwide sovereignty. New residents should check if they are still taxable in their old country. For example, UK Olim must make a ‘‘clean break‘‘ from UK residence according to the recent Gaines-Cooper court case. US citizens must file keep filing US tax returns regardless of where they live. But here‘s a tip: Israel has tax treaties with 50 other countries – they sometimes help – check them out.
Israeli sourced income
This is the usual culprit. The 10- year Israeli tax holiday applies only to non-Israeli source income of Olim. By definition, if you work in Israel for anyone at all, you generate Israeli source income and you will pay Israeli tax from day one.
For example, if a person makes Aliya and works by Internet and Skype from his new home in Jerusalem for their old firm in London or New York, he or she will be facing an Israeli tax and national insurance liability on every earned shekel from work done from the Jerusalem home or anywhere else in Israel. Israeli income tax rates can amount to a maximum of up to 45 percent in 2010-2011, or 44% in 2012. National insurance (social security) is also payable at various rates on most types of income up to NIS 79,750 a month; employees pay up 3.5% – 12%; employers pay 3.85% – 5.43%; freelancers pay national insurance of 9.82%-16.23%.
What can be done?
First of all, if your work takes you abroad, keep a regular calendar record of those days and claim an exemption from Israeli tax for income derived abroad. But check if you need to pay tax in the foreign country concerned. If you do, can you deduct your flight and accommodation expenses there? Second, have a good corporate structure and business model. Tax savings or deferral are often possible.
This is an extensive area and specialist advice is recommended. L, claim additional credit points for Olim.
What about credit points?
Most countries grant their resident taxpayers deductions or personal allowances which reduce taxable income. Israel is different, it grants personal tax credits, which are known as credit points. They reduce the tax due, not the amount of taxable income. Each credit point is currently worth NIS 205 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 an Oleh gets 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.
For example, if a person made Aliya last week and straight away earns NIS 10,000 per month. Suppose the tax on that is NIS 1,209.
The Oleh can claim 5.25 credit points in his first 18 months in Israel which reduce his Israeli tax bill by NIS 1,076, leaving a balance of tax due of NIS 133 that month.
A five-year exemption is proposed for royalties derived by people invited to work at an academic institution or a hospital.
Currently, the extra credit points only apply to someone who holds a Teudat Oleh (immigration certificate) under the Law of Return, or someone eligible for this who holds a temporary resident‘s visa. The procedure is that the individual shows these documents to his local tax office which then confirms his extra credit point entitlement on Form 101. The individual then hands in Form 101 to his employer.
Credit point proposals
The bill before the Knesset proposes to grant the above extra credit points to privileged returning residents from 2011, if they lived abroad six consecutive years. And to avoid queuing at the tax office, it will be enough to receive a certificate from the Immigration Ministry that they lived abroad those six years, according to the proposals.
Double tax on inheritance
Israel does not impose tax on death, but it does impose capital gains tax on asset sales. Suppose a person bought a home in London for GBP 30,000 in 1975 and bequests it to his son or daughter living in Israel in 2010, who then sells it for GBP 1 million.
The capital gain of GBP 970,000 (recalculated in shekels) will be taxed at Israeli capital-gains tax rates of up to 40%, with no credit for UK inheritance tax (40%). The result is up to 85% in tax. A solution would be to request concessionary relief from the Israel Tax Authority after the person‘s death. Better still, don‘t wait and don‘t bequest the asset: use a trust instead.
Olim from the UK are taxed in the UK on their pensions if they claim the Israeli 10-year tax holiday, according to the current UK-Israel tax treaty.
The solution: consider converting the pension, before pension payments begin, to a QROPS – Qualified Recognized Overseas Pension Scheme approved by Her Majesty‘s Revenue & Customs. Alternatively, wait for a draft new UK-Israel tax treaty to be ratified and implemented – but this might take time. Furthermore, Olim from all countries face uncertain tax treatment after the 10-year tax holiday is over for many types of foreign retirement plans – US IRA‘s and 401K plans, UK SIPPs, etc. But the Israeli tax should not exceed the amount you would have paid in the old country.
To sum up
The 10-year exemption is not always available. Business and investment structures need to be planned before Aliya if large amounts are involved. And sometimes, the 10- year exemption is extendable if you read the tax law carefully.
As always, consult experienced tax advisors 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.