The streets of London are not paved with gold, and there are no free lunches in New York. Even the Israeli tax breaks for new immigrants have their problems.
What‘s on offer
When you become a new Israeli resident, Israel grants you a 10-year tax holiday regarding all non-Israeli source income and capital gains. This applies to new residents who become resident on or after January 1, 2007. Exempt income and related assets do not need to be reported to the Israel Tax Authority. 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. (see below).
How do the regular Israeli tax rates compare?
Individual tax rates, when they apply, range from 10 percent to 46%. Dividends, interest and capital gains are taxed at only 20% if you hold under 10% of the investee entity; otherwise, higher rates apply.
Institute payments are imposed on the first NIS 76,830 per month at the following rates:
Freelancers 9.82%-16.23% (52% tax deductible);
Not working 9.61%-12% (52% tax deductible);
Nil on most dividends and capital gains.
Companies are taxed at 26% in 2009 and 25% in 2010. Various tax breaks and government grants are available for industry, technology, tourism and certain rental properties.
Problem number 1:
Who is a ‘‘resident‘‘?
Your Israeli fiscal residency has little connection to your immigration status. For Israeli tax purposes, an Israeli resident is defined as an individual whose center of living is in Israel, taking into account the person‘s family, economic and social links.
A rebuttable presumption of Israeli residency will apply in either of the following circumstances: the individual is present in Israel at least 183 days in a tax year ending December 31; or the individual is present in Israel at least 30 days in the current tax year and 425 days cumulative in the current and two preceding tax years.
Aside from the number of days‘ presence in Israel, the ‘‘center of living‘‘ criteria listed in the law are: location of permanent home; place of residence of the individual and his/her family; place where the individual regularly works or is employed; location of active and material economic interests; place where the individual is active in various organizations, associations or institutions; employment by certain official bodies.
No concepts of domicile or ordinary residence exist for Israeli tax purposes. Citizenship is usually not relevant.
Nevertheless, you can postpone becoming an Israeli fiscal resident. You may elect on Form 1130 within 90 days after arrival in Israel to remain a foreign resident for Israeli tax purposes in your first year in Israel. This will not extend the 10-year tax holiday to 11 years.
Your date of arrival is the earliest of the following: date in the Immigration Ministry new/returning resident certificate; when you have a permanent home in Israel available for personal use; when your family (spouse, children) have a permanent home in Israel; after 183 days‘ presence in Israel.
In cases of doubt or dual residency (fiscally resident in your old country and Israel simultaneously), special rules in Israel‘s tax treaties may help.
If you left Israel and are coming back, you still get the 10-year tax holiday if were resident outside Israel for five years and return to reside in Israel by December 31, 2009. These people are referred to as ‘‘senior returning residents‘‘ (Toshvim Hozrim Vatikim). If you left Israel and don‘t come back until 2010 or later, you only get the 10-year tax holiday if you were resident outside Israel for at least 10 years.
Therefore, returning residents should consider returning to Israel by the end of 2009 if they have been away from Israel between five and 10 years, to be eligible for the 10-year tax break.
Working in Israel for foreign firms
Thanks to e-mail, the Internet and cheap videoconferencing, it is very easy to work in Israel for companies located outside Israel. But there can be a number of tax implications for the individual and the company, in Israel and abroad. Why?
On the personal side, work done in Israel is Israeli source income, not foreign source income. Such Israeli source income is not covered by the 10-year tax holiday for new/senior returning residents; it is taxed at regular Israeli rates in Israel as soon as you start working in Israel.
In addition, there is the corporate side. Let‘s suppose you work in Israel for the ABC Group of London. If ABC does business in Israel through you, it must pay 26% Israeli company tax on Israeli source profits you generate. And, for customers in Israel, there is a 16.5% Israeli VAT liability.
This may not be what ABC bargained for, even if the Israeli company tax is creditable abroad.
Israel has self-assessment, and you should register a business with the Israel Tax Authority when starting up in Israel. Given this, what are the options? There are at least four:
You become a self-employed (independent) contractor of ABC;
You set up your own company that contracts with ABC;
ABC opens a branch office in Israel and employs you;
ABC opens a subsidiary company in Israel and employs you.
Each of these scenarios has its pros and cons, and professional advice is necessary.
If you travel around the globe, income relating to days worked outside Israel will be eligible for the 10-year Israeli tax exemption.
Structuring your own Israeli venture
If you expect to make more profit in Israel than you need to live on, consider forming a regular private Israeli company. It will pay 26% tax, and you can defer further tax until you receive a bonus or dividend, which could be years later. You should do so BEFORE taking up Israeli residence, for capital-gains tax reasons.
Where to stash your cash
If you place cash on a foreign-currency time deposit at a bank branch in Israel, known as ‘‘Patach‘‘ (Pikadon Toshav Chutz), Israel will not tax the interest for 20 years if you are a new resident, or for five years if you are a returning resident. If you prefer to use a non-Israeli bank deposit, the 10-year tax-holiday exemption is available. There is no exchange control in Israel. Interest rates are low at present, and you should seek professional investment advice.
Double tax on inheritances
Israel does not impose tax on death, but it does impose capital-gains tax on asset sales. Suppose Mr. Cohen bought a home in London for �30,000 in 1973 and bequests it to his son or daughter living in Israel in 2009, who then sell it for �1 million. The capital gain of �970,000 (recalculated in shekels) will be taxed at Israeli capital-gains tax rates of up to 46%, with NO credit for UK inheritance tax (40%).
What‘s the result: up to 86% in tax. What‘s the solution: request special relief from the Israel Tax Authority after Mr. Cohen‘s death. Or don‘t wait and don‘t bequest the asset: use a trust instead. A similar problem would apply if Mr. Cohen resides in the US, Canada, South Africa, etc. Detailed rules apply in each country, and professional advice is vital.
The settlor of a trust moves to Israel
If you are the settlor (grantor) of a trust and move to Israel, the trust will get the same 10-year tax holiday for non-Israeli source income and gains as you. But additional tax-planning opportunities often exist for families with relatives scattered around the world (please get specific advice).
Israeli tax on foreign pensions
You can claim the 10-year tax holiday. Then what happens? From year 11 onwards various possibilities exist, and you should not pay more tax in Israel than you would have in the country of payment of the pension. Unfortunately, there is no official guidance regarding lump-sum retirement funds, such as a US IRA or Canadian RRSP or a UK SIPP where applicable.
As always, consult experienced tax advisers in each country at an early stage in specific cases.
Leon Harris is an international tax specialist at Harris Consulting & Tax Ltd.