Tax relief package for new immigrants and returning resident

Tax relief package for new immigrants and returning residents168 amendments to the Income Tax Order Published September 16, 2008 General Background

The Knesset Committee for Immigration Absorption has approved the Amendment to the Income Tax Order (Amendment 168) that includes an extensive, unprecedented reform that offers tax bonuses and relief to new immigrants and returning residents. The reform was shaped by the Tax Authority at the Ministry of Finance…

Tax relief package for new immigrants and returning residents
168 amendments to the Income Tax Order
Published September 16, 2008

General Background

The Knesset Committee for Immigration Absorption has approved the Amendment to the Income Tax Order (Amendment 168) that includes an extensive, unprecedented reform that offers tax bonuses and relief to new immigrants and returning residents. The reform was shaped by the Tax Authority at the Ministry of Finance and the Ministry of Absorption, on the occasion of the 60th Anniversary for the State of Israel.

The legislation was formed with the aim of promoting immigration and increasing its volume, as well as bringing back to Israel Israelis living abroad, by offering significant tax bonuses and removing tax bounds.

One of the legislation goals is to establish investments in Israel and enrich its human capital in such a manner that would contribute to the country’s economic and social development, in accordance with the policy of the State of Israel.

The guiding principles at the base of this new legislation are as follows:

• Exemption from tax and from accountabilities for a lengthy period of 10 years.
• The legislation is in effect for new immigrants and returning residents who immigrated or returned to Israel since the beginning of 2007.
• The legislation validity is for all types of income produced or grown outside Israel only.
• Creating certainty regarding the timing of residency detachment.

Who is an Israeli resident? (an individual)

• The essential test – the “life center” test. “An Israeli resident” is generally defined in the Income Tax Order, as an individual whose life center is in Israel.
• The order enumerates a few auxiliary tests to determine the location of one’s life center:
  • The totality of an individual’s familial, economic & social relationships;
  • His permanent home and his and his family’s residence;
  • His usual or permanent work location;
  • The location of his economic, active and essential interests and the location of activity in various organizations & institutions.
• Numerical right of possession for determining residency: Presence in Israel of 183 days or more during the tax year.

New Immigrant & Returning Resident

• New Immigrant – An individual immigrating to Israel and becoming a resident of Israel for the first time.
• A Returning Resident – An individual who ceased being an Israeli resident, who stayed permanently outside of Israel for at least three consecutive years after he had ceased being an Israeli resident.
• • In general, the day of arrival in Israel with the intention of settling down in the country is considered the day when the individual has become an Israeli resident.

The main tax benefits

The changes in Amendment 168 regarding new immigrants and “veteran returning residents”
Who is entitled for tax benefits?

Validity regarding someone who became an Israeli resident since 01.01.2007 onwards:

• New Immigrant
• “Veteran returning resident” – a new taxation status has been determined for someone resuming his status as an Israeli resident, having been a foreign resident for at least 10 consecutive years. This status will broaden the tax relief presently being given to a returning resident, and will make them equal to the extended relief given to someone becoming an Israeli resident for the first time.
• Temporary provision – an individual who returned to Israel during the years 2007-2009 will be considered a “veteran returning resident”, if he was a foreign resident for at least 5 years (instead of ten).
• Aggravation of the criterion for being considered a (regular) returning resident: Prior to the amendment, a returning resident was someone who returned to Israel, having ceased being an Israeli resident for at least 3 years. This period has been extended to 6 years; however, this extension applies only to someone who ceased being an Israeli resident beginning on January 1, 2009.

I.e., someone who returns to Israel after January 1, 2009, but ceased being an Israeli resident prior to this date, will still be considered a returning resident, if he stayed outside of Israel for at least 3 years, and not 6 years after having ceased to be an Israeli resident.

Time of residency breaking-off

• An addition to the definition of “foreign resident” – two accumulative conditions:
  • The individual stayed for at least 183 days outside of Israel during the first two tax years of his departure;
  • The individual’s life center is not in Israel during at least an additional two tax years.

When the above conditions have been fulfilled – the individual will not be considered a resident of Israel since the day when he left Israel!

• Creating certainty regarding the time when foreign residency commences;
• The possibility of being considered a foreign resident according to the previous regulation still exists – absence of life center in Israel;
• The above definition coming into effect – regarding immigrants and veteran returning residents who immigrated or returned to Israel from 1.1.07 onwards.

Detailing:
“Foreign resident” has been defined in the order by a residual definition, i.e., – whoever is not an Israeli resident is considered in any case a foreign resident. Actually, even in view of the preemption of days of stay in Israel, the tax authorities’ position was that it is impossible to prove immediate residency disengagement upon leaving Israel, unless by completion of the disengagement process, that takes time.
Since the above amorphous definitions caused numerous frictions between the taxpayers and the tax authorities concerning the question of the timing of disengagement from the center of life, and thereby disengagement of residency, from Israel, therefore the definition of a foreign resident was expanded.

It was determined that if the individual proves disengagement from the life center in Israel during any two consecutive years, then he will be recognized as a ‘non-resident’ retroactively even during the two years preceding those two years, if during those two preceding years he stayed outside Israel for at least 183 days per year.

Thus, if the discussion regarding life center is done after four years have passed since the individual left Israel, then the discussion regarding life center during the first two years becomes redundant, if from the third year onwards residency disengagement is proven, since the disengagement will be retroactive for the previous two years, subordinate to a totally technical test of an 1853 day stay outside Israel in each of only the last years.

If the discussion regarding life center is prior to the completion of four years since the individual exited Israel, then the tax authorities might not recognize residency disengagement, and in the meantime the individual will be considered an Israeli resident; however after four years have passed this determination could be changed retroactively.

This can be demonstrated using the time axis:

Types of exempt income

• The rule – Tax exemption for 10 years on all types of income produced or grown outside Israel or originating in property outside Israel.
• Expansion of benefit application also on property acquired or activities initiated after the individual’s immigration or return to Israel.
• The changes compared to the prior rule:
  • Passive income – extension of the period of time to 10 years, instead of 5.
  • Capital gains – similar to prior rule;
  • Income from business – period extended to 10 years instead of 4 (only for a new immigrant, under certain conditions);
  • The discount for an immigrant’s allocation has been expanded, so that it applies also to someone who was a veteran returning resident, if the allocation derives from his work abroad.
  • Regarding a (regular) returning resident, the 5 year exemption on passive income produced abroad, and the 10 year exemption on capital gains from property acquired abroad during the time that he was a foreign resident, abide, with an additional relief, as detailed below.

In the past, the tax authorities raised a claim for refusing the exemption, in the following case:

An individual bought an investment portfolio, including securities traded in the stock exchange abroad, during the years when he was considered a foreign resident. After he resumed being an Israeli resident, the individual produces income from this investment portfolio (interest, dividend or capital gain), and this income is tax exempt from the force of his being a returning resident, as mentioned above.

However, if the income is invested immediately back in the same investment portfolio, the tax authorities claimed that, regarding these “new” investment, these are properties bought after the individual has already resumed being an Israeli resident; therefore, additional income arising from these investments will not be entitled to a tax exemption, although this is a “closed circle” within the same investment portfolio.

In order to avoid friction in the matter, it has been explicitly determined that as long as this is indeed a “closed circle” and securities traded at a stock exchange abroad, without investment of new monies in the investment portfolio after the individual resumes being an Israeli resident, the investment portfolio will continue being regarded as a property acquired while the individual was a foreign resident, and he will be entitled to a tax exemption on his income from this portfolio.

It was determined that this relief will apply retroactively from January 1 2007, for whoever became a returning resident since that date.

• • Income from work and occupation – a new exemption not included in the previous rule;

Acclimation Path

• Granting a one-year adjustment period since the day of arrival in Israel.
• Adjustment period – a choice for the individual having arrived in Israel.
• The meaning: The individual will not be considered an Israeli resident for tax purposes for the entire year of adjustment.
• This is not an additional bonus year – if after the year of adjustment the individual decides that he does want to be considered an Israeli resident, then the adjustment year will be included in the above mentioned 10 years of exemption (namely, there will be 9 years of exemption left, and naturally the exemption will apply also during the year of exemption);
• The condition: A notice on the choice of this alternative within 90 days from the day of arrival in Israel (or from the day of publication of the rule, the later of the two).

Foreign companies controlled and managed by a new immigrant or a veteran returning resident

• The “Control & Management” Test is an alternative test to determine the company’s residency. An Israeli resident company is defined, inter alia, as a league of people with the control and management of its business being activated in Israel.
• Consequently, it is reasonable that the company becomes an Israeli resident following the arrival of the “managing” stock owner’s arrival in Israel.
• According to the amendment, a company incorporated outside Israel and managed by an “immigrant” or a “veteran returning resident”, will not be considered an Israeli resident for a period of 10 years since the day of immigration or return to Israel, on condition that the league of people was not considered an Israeli resident, even if the control on its business and its management were not operated by an individual, as mentioned, or by someone on his behalf.
• However, the said league of people is given the opportunity of choosing anyway to be considered an Israeli resident, if they so wish.

Exemption from accountability for income originating abroad and for assets abroad

• Exemption from submitting an annual report on “exempt income” of a new immigrant and a veteran returning resident, for 10 years since the time when he became an Israeli resident.
• An exemption from submitting a “declaration of capital” on assets that income from them is exempt by a new immigrant or a veteran returning resident, for 10 years since the time that he became an Israeli resident.
• The above exemptions will not apply for anyone who asked to be obliged with tax in spite of the exemption that is coming to him for his income, nor will they apply for an asset received as a tax exempt free from a relative following January 1, 2007, and for income resulting from this asset.

Concentration of benefit according to Amendment 168