An Israeli tax exemption is available for five to 10 years for certain types of foreign-source income.
On the same day we ran an article on tax breaks for returning residents (June 5), the Israel Tax Authority issued guidance regarding part of those tax breaks; namely, extra tax credits available to returning residents who lived outside Israel at least six years.
A BRIEF RECAP
An Israeli tax exemption is available for five to 10 years for certain types of foreign-source income. With regard to income derived in Israel, no exemption applies, but returning residents may receive extra personal credits, known as ‘‘credit points‘‘, in their first three and a half years in Israel:
three extra credit points in the first 18 months after their immigration, saving them Israeli tax of NIS 627 per month in 2011;
two extra credit points in the next 12 months, saving them Israeli tax of NIS 418 per month in 2011;
one extra credit point in the next 12 months, saving them Israeli tax of NIS 209 per month in 2011.
Returning residents get these extra credit points only if they previously lived abroad six years continuously and return to Israel between May 16, 2010, and September 30, 2012. If they return to Israel in the period May 16-December 31, 2010, the three and a half years begin on January 1, 2011. If they return to Israel in the period January 1-September 30, 2011, the three and a half years begin on the date they return to reside in Israel.
Returning residents need to follow the procedures contained in a letter dated June 2, 2011, from the Israel Tax Authority‘s senior deputy director of assessment and audit to employers and ITA service centers.
There are three alternative procedures for obtaining the extra credits:
An employer may rely on certification from the Immigrant Absorption Ministry that the individual is a ‘‘privileged returning resident‘‘ who lived abroad six years. This cannot be done if the individual has more than one employer;
The individual may obtain confirmation of eligibility for the extra credit points from a local tax office by filing Tax Form 1507. The individual declares on the form that he was present in Israel no more than 120 days in the six years ending on the date of return to Israel (six tax years are not the same as six calendar years);
The individual files an annual personal tax return and claims the extra credit points on the return.
WHAT SHOULD YOU DO?
This will depend on individual circumstances. First, claim the extra credit points for Israeli source income. Second, if you lived away from Israel more than 10 years, keep a diary of your work done in Israel and abroad, respectively; income from work done abroad will be exempt from Israeli tax. Third, always check the foreign tax situation. Fourth, plan accordingly.
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.