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Guide to Tax Benefits for an Immigrant and Returning Resident

What is a tax?

Tax is a mandatory fee imposed on individuals and corporations with income by a public authority. The tax is an essential part of the Authority's budget and is necessary to finance the Authority's objectives. Tax collection allows a government to provide essential services to its citizens, and to realize national goals such as economic growth, developing infrastructure, raising the citizens’ standard of living, immigrant absorption, reducing social gaps, and more.

All income of an Israeli resident, even if originated from abroad, must be reported and tax payed for it under the Income Tax Ordinance.

The income which must be reported and is taxable includes:

Active income - Income earned by personal effort, such as employee wages, commerce, business proceeds.

Passive income - Income that does not require personal effort and which usually doesn’t entail expenses, such as rent for an apartment you own, royalties, pensions, interest payments, linkage payments, dividends, patent royalties, etc.

The obligation to report requires you to submit an annual statement to the Income Tax Authority which lists all personal income, your spouse’s income and the income of all children up to age 18, and to attach the appropriate certification and references to the statement.

Failure to report income from abroad can result in civil and criminal penalties.

In order to encourage immigrants or Israelis who are considering returning to Israel (returning residents), the Tax Authority tax put together a tax package that provides a range of benefits for new immigrants and returning residents which removes significant tax barriers that may hinder their coming to Israel.

The benefits offered in the reform include: exemption from reporting income tax on active and passive income from abroad (which was listed above) for a period between five and ten years (see details below) from the date one returned and / or immigrated to Israel. Note that the benefit also includes whatever one purchased abroad after he returned to Israel.

Important : Before immigrating and / or returning to Israel, and before your eligibility period concerning tax reporting ends, it’s best to consult with an accountant or tax advisor.

Who is entitled to a tax benefit ?

A.

An immigrant - One who acquired the status of an Israeli resident for the first time and who had never been a former resident of Israel.

Vatik returning resident - An individual who in the past was a former resident of Israel and remained abroad for at least ten consecutive years before returning to Israel. He has the same tax benefits as an immigrant.

The list of exemptions (active and passive) that are included in the “ten year” tax benefits for immigrants and Vatik returning
residents are as follows:

 Exempt from reporting tax on business revenue : in the case of revenue from running a company or holding company shares outside Israel. For example: One who runs a business or has business shares abroad before returning to Israel, and the business continues to exist and operate abroad even after his return to Israel, is entitled to a tax exemption on his income from that business.

Another benefit: the Department of Business Entrepreneurship helps returning residents and / or immigrants in their first year in Israel with business consultations, promoting an existing business, and / or setting up a new business, as well as advice on Israel’s tax system.

Also, one can be given a further extension of ten years to be exempt from tax (for a total of 20 years), provided that the recipients of the benefits will significantly invest their money in Israel from the day that they immigrated or returned to Israel.

  Exemption from filing a capital statement : During the entire period of the benefit, one is exempt from filing income tax returns (a capital statement) on one’s capital and assets located abroad.

•  Exemption from reporting capital earnings : a tax exemption on the sale of existing property abroad. For example: Anyone who had property abroad before he returned or moved to Israel, can defer the sale even after his return to Israel without fear of tax liability on the sale.

If the property was sold after ten years, he will be exempt from the growth in earnings until the end of the ten years, and will charged normal capital gains tax starting from the end of the benefit period.

  Exemption from passive revenue : tax exemption for income earned abroad without personal effort or without expenses deducted from the earnings, such as interest payments, foreign currency yields, dividends, stipends, pensions, royalties, rental fees, securities.

 Exemption from active revenue : tax exemption on income earned abroad due to personal effort, such as a profession and job.

•  Corporation (a group of persons) : Controlling shareholders who transferred their residence to Israel, are exempt from filing reports and making tax payments for the corporation until ten years after their arrival in Israel.

In addition, following the Economic Efficiency Law, a new provision was added that allows exemptions from income tax and from reporting for an additional ten years (for a total of 20 years), provided that the recipients of the benefit will make a significant investment in Israel within two years of the date that they immigrated or returned to Israel.

  Tax credits : Beyond these exemptions provided for foreign income, new immigrants and Vatik returning residents (who lived abroad consecutively 10 years or more) are also entitled to a tax reduction for the part of the year that they had earnings in Israel. This tax relief is given in credit points for up to 42 months from the time they immigrated to Israel.

A breakdown of how the credits work: For the first 18 months, they get 3 credits per month. For the following 12 months they get 2 credits per month. And for the 12 months afterwards, they get one credit point for each month. (Generally, the more credits, the lower the tax bracket. Israeli citizens also receive credits according to various situations defined by the law - if they live in development areas, have children, are disabled, etc.).

The 42 month count begins after they receive their immigrant's certificate, and continues consecutively even if the immigrant has no income. This means that if the immigrant had no income for 42 months, he is no longer able to take advantage of the benefit.

If an immigrant has income from interest on foreign currency deposits in an Israeli bank, he is exempt from paying tax for twenty years after immigrating to Israel, as long as the only source of funds deposited in those accounts belonged to the immigrant before he immigrated to Israel, and according to the terms set in law.

Please note : The benefits noted above apply only to a Vatik returning resident and an immigrant whose obtained his status after January 1, 2007.

Important ! Income tax authorities are taking the view that a tax exemption is granted only in respect of income from employment or services performed abroad. Therefore, a new immigrant who receives wage income from a foreign employer, or payment from a foreign customer, while the work was carried out from Israel, must report and pay tax on that income. In cases where the work is carried out both in Israel and abroad, the tax authorities can demand that the income be split into two parts: the part that was generated in Israel will require reporting and paying tax to Israel, and the part that was generated abroad, will be exempt from reporting and payment of taxes to Israel.

B.

Regular returning resident - an individual who was once a resident in Israel and lived abroad (as of January 1, 2009), at least six full years before returning to Israel.

The list of exemptions included in the tax benefits for a regular returning resident is as follows :

•  Exemption from tax from passive income for five years after his return : on sources of money earned abroad when he was no longer an Israeli resident, such as interest payments, foreign currency yields from foreign currency deposits, dividends, stipends, pensions, royalties, rental fees, shares, etc.

•  Exemption from tax on his capital earnings for ten years after his return : on the sale of his property abroad (including preferential shares) which was in his possession abroad before he returned to Israel. The tax exemption also applies if he deferred the sale until after his return to Israel.

Regular returning resident : One who left Israel until December 31, 2008 is considered a "regular returning resident”, even if he only resided abroad for three years (instead of the six years required for returning residents).

Regular returning resident : One who returned to Israel between the 2007 tax year and the end of the 2009 tax year, and had lived abroad "five consecutive years only" before returning to Israel, an temporary provision was regulated to give him tax benefits just like a Vatik returning resident (who was abroad ten years).

What is a “year of acclimatization”?

A year of acclimatization — a Vatik returning resident and a new immigrant can apply for “a year of acclimatization” during which they are not considered Israeli residents for tax purposes — even if the center of their life is in Israel. Even if they eventually choose not to settle in Israel after their year of acclimatization, and then returned again to Israel, that year of acclimatization will be considered as if they were lived abroad, and they do not have to wait another ten years to get benefits if they immigrate or return to Israel. They will receive all the benefits noted above. Likewise, a new immigrant who chose a year of acclimatization and returned abroad, will not have the tax consequences that apply to an Israeli resident who left the State of Israel.

The meaning of “a year of acclimatization” is that one who chooses it is considered for tax purposes in Israel like one living abroad for the duration of a year from the day that they arrived in Israel.

Israel gives a “year of acclimatization” because the decision to change the “center of one’s life” is a complex decision with many ramifications. This decision takes into account, among the rest, the tax consequences resulting from moving to a new residence, which can prevent one from deciding to make the move, make it harder to decide, or undermine one’s confidence to make the decision.

Please note -  Getting “a year of acclimatization” is conditional on a returning resident or immigrant giving prior notice within 90 days of arriving in Israel that he wants a year of acclimatization. The Tax Authority recently published the form required to get a year of acclimatization. Note that the form is addressed to the Ministry of Absorption (Form 1130). You can get a sample form in our office, or download it here.

It’s a good idea to consult with an attorney and / or an accountant who specializes in taxes before you immigrate or return to Israel.

The meaning of “date of arrival” concerning the year of acclimatization :

For the purpose of defining the year of acclimatization, the "date of arrival” to Israel is the earliest of the variety of options below:

1.  The day one was issued an immigrant or returning resident document by the Immigrant and Absorption office.

2.  The day that the individual who is an immigrant or returning resident acquired a permanent home in Israel — either by renting or buying —  or even if he just received permission to live in a certain place. This is provided that the immigrant or returning resident has no 'permanent home' in another country in the world.

3. The day that a family head who is an immigrant or returning resident acquired a permanent home in Israel available for his personal use — either by renting or buying —  or even if he just received permission to live in that house. This is provided that his family is with him in Israel. (“Family” in this case means a spouse or a child under 18 years).

4. The day after a person lived in Israel for at least 183 days of a tax year.

Note that the Director of the Tax Authority can extend the period during which the individual is considered as “having arrived in Israel” beyond the stipulated 183 days (after the person fills out a form and submits it).

As mentioned above, whatever date is determined for the person as his date of arrival, he can only ask for a year of acclimatization up to 90 days after that date.

Taxation for a foreign resident for income generated or earned in Israel :

We wrote above that as one of their benefits, immigrants and returning residents retain their status as foreign residents who are exempt from paying tax for revenue and transactions originating from abroad. Nevertheless, they are taxable for all income generated or earned in Israel, without exception.

Therefore, if a foreign resident has income-producing property in Israel from rent (passive income), he is liable like every Israeli to pay tax as prescribed by law.

He is also liable to pay VAT for each transaction performed in Israel, or for the importation of goods into Israel.

Questions and Answers:
Does an immigrant or returning resident (who spent 10 years abroad) get tax benefits from their active income that was generated or accrued in Israel
Answer:
No, but they can get credit points which will reduce their tax payment, as is explained in the Guide
What are “credit points”
Answer:
A credit point (which the law stipulates is equal to an amount of money) reduces the amount of tax a person has to pay. One gets credit points for having a spouse, children, etc.
What is “active income”
Answer:
Active income is income derived from personal efforts, such as your job, business deals, and a business generating profits.
What is “passive income”
Answer:
Passive income is income that is generated without personal effort, in which usually no expenses are deducted from revenues. This includes rent for an apartment, royalties, pensions, accounts generating interest, linkage differentials, dividends, patents, etc.
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