The Israel Tax Authority has just published Form 1130 – ‘‘Notice of election of the settling-in year‘‘ – for new and senior returning residents. It‘s in Hebrew, presumably to speed up the settling-in process. The form was accompanied by important clarifications from the ITA.
What are the aliya tax breaks?
First a quick recap of the tax breaks. (For details, see an earlier article in The Jerusalem Post entitled ‘‘Decisions for olim‘‘ (February 11).
People who became Israeli residents for the first time on or after January 1, 2007, may now enjoy a 10-year exemption from Israeli tax on income and capital gains accrued or derived outside Israel or from assets outside Israel, unless they request otherwise.
‘‘Senior returning residents‘‘ are treated the same as new residents. A senior returning resident is an individual who returned to Israel to reside after being a foreign resident for: (a) at least five consecutive years, if they return to Israel in the tax years 2007-2009; (b) at least 10 consecutive years, if they return to Israel after 2009.
Notwithstanding the above, such people may elect on Form 1130 within 90 days after arrival in Israel to remain a foreign resident for Israeli tax purposes in their first year in Israel – a ‘‘settling-in year.‘‘
This is to give them a chance to make up their minds whether they really want to uproot and move to Israel.
A person who arrived in Israel by the end of 2008 who is interested in electing a ‘‘settling-in year‘‘ may do so by March 31, 2009, and the election will be deemed to have been made on time.
If these people stay on in Israel, the settling-in year forms part of the 10-year exemption period; you don‘t get 11 years!
When does the settling-in year begin?
According to the tax law, the settling-in year (if elected) begins on the date of arrival in Israel of the person concerned. The ITA has now clarified that the arrival date will be deemed to be the earliest of the following dates:
1. Date when classified as a new immigrant (oleh hadash) or a returning resident (toshav hozer) according to the criteria of the Immigrant Absorption Ministry and as shown on the certificate issued in this regard by the ministry (teudat oleh/teudat toshav hozer);
2. The first date on which the person had a permanent home in Israel available for his/her personal use, regardless of whether he/she owns or rents the home or is allowed to use it, if that person does not own a permanent home anywhere else in the world.
The latest clarification doesn‘t define ‘‘permanent home.‘‘ But the ITA‘s Circular 8/2002 of June 2, 2002, states that a permanent home is ‘‘a place in which an individual has personal connections� for an extended period�available at any time‘‘;
3. In the case of an individual with a family, the first date on which the individual or his/her family have a permanent home in Israel. For these purposes, the family is the spouse or a child aged under 18. This will be unpopular in many cases where the wife and kids move to Israel but the husband continues working abroad and merely visits the family at weekends and festivals. It also appears at odds with the Arie Gonen case, in which the Supreme Court ruled that a person arrives in Israel when he arrives, not when his wife does;
4. The date when the individual begins to be in present in Israel for 183 days in the tax year. In such a case, the ITA says its director is authorized to extend the time allowed for electing the settling-in year to 90 days after the 183 days have expired.
These four ‘‘arrival‘‘ criteria are reproduced on Form 1130 (settling-in election) as instructions for filling out the form.
What are the main
implications of the settling-in year?
According to the ITA‘s clarification, the settling-in year has a number of tax implications:
Fiscally nonresident for another year for Israeli tax purposes (note: you may be nonresident in the old country as well, i.e. resident nowhere for a year);
No exit tax (ITO Section 100A) if you leave in the settling-in year;
Nonresident investor for another year for the purposes of Israel‘s tax breaks relating to Approved Enterprises and Privileged Investor. This may result in a lower tax rate or exemption for a longer period;
Nonresident for another year for the purposes of Israeli anti-avoidance legislation relating to controlled foreign corporations (CFC‘s) and foreign professional corporations. This may be beneficial;
Capital gains tax exemptions upon selling Israeli securities;
Can‘t claim tax treaty benefits as an Israeli resident under in the settling-in year;
No personal ‘‘credit points‘‘ in the settling year;
The settling-in year election cannot be revoked.
The ITA‘s clarification about ‘‘arrival‘‘ is a mixed blessing. On the one hand, it provides greater certainty regarding when you need to consider making a ‘‘settling-in year‘‘ election. But, reading between the lines, care is needed. A person is resident for Israeli tax purposes where their ‘‘center of living‘‘ is located – a vague, woolly concept. The ITA may now take a strict view on when residency status begins by applying the earliest of the above ‘‘arrival‘‘ tests even if you don‘t elect the settling-in year.
As always, consult experienced tax advisers in each country at an early stage in specific cases.
Leon Harris is an international tax specialist.