The current tax regime for Olim took effect on January 1, 2007 pursuant to Amendments Section 168 and 197 to the Income Tax Ordinance.
Consequently, there is now an exemption for Israeli tax purposes for ten years to new residents and senior returning residents (lived abroad ten years) from: (a) Israeli tax on foreign source income and gains; (b) reporting such income and gains; (c) reporting related overseas assets; (d) various Israeli anti-avoidance rules relating to certain foreign companies and trusts. This ten year exemption is often referred to as a tax holiday.
Nevertheless, Olim are taxable on Israeli source income is taxable from day one. Surprisingly, that includes income for work done in Israel, even if the work is done for a foreign company.
Olim who took up residence before 2007 received more limited tax breaks for 4 – 10 years.
Some Olim who took up Israeli residence in 2007 are nearing the end of their ten year tax holiday.
They should consult professional advisors before 2017. What needs reviewing?
Much will depend on individual circumstances and any structure In place. Below we discuss a few of the possibilities.
First, is it time to cash in overseas investments before the ten year tax holiday is over? This may involve evaluating potential gains asset by asset, checking applicable exchange rates, calculating Israeli tax, ascertaining any foreign tax, checking the availability of foreign tax credit, checking loss utilization if relevant, what to re-invest in, etc.
Second, If an overseas asset is not sold until the tax holiday is over, a partial exemption is still possible, pro rata to the ownership period up to the end of the tax holiday divided by the total ownership period. Does that appear preferable?
Third, in the case of an overseas manufacturing or trading company with inventory (=stock), can the inventory be run down by selling most or all of it shortly before the tax holiday is over
Fourth, in the case of an overseas service company, can work done be invoiced before the tax holiday is over?
Fifth, especially after the above, is it time to extract a dividend and/or a salary and/or a bonus from an overseas company before the tax holiday is over? In the case of a salary or bonus, does it relate to work done in Israel (taxable in Israel) or work done abroad (perhaps taxable there and/or deductible there)? Also, if a bonus is paid, it may be subject to national insurance even if it relates to work done abroad according to certain officials at the National Insurance Institute. This interpretation is open to dispute.
Sixth, if the Oleh is a director and majority shareholder for a foreign company, it may be controlled and managed in Israel. After the tax holiday, that company may well be deemed to be fiscally resident and taxable in Israel. Consider restructuring the management before the tax holiday is over.
Seventh, if the OIeh owns a foreign offshore passive investment corporation, it may become a controlled foreign corporation (CFC) after the tax holiday is over. CFC rules impose tax on deemed dividends at rates of up to 32% on 10%-or-more shareholders of foreign companies controlled over 50 per cent by Israeli residents that derive mainly passive income or profits taxed abroad at a rate of 15 per cent or less. Consider restructuring and/or extracting a dividend before the tax holiday is over. On the other hand, a CFC may be worth keeping if it blocks foreign estate/inheritance taxes, but then a switch to an Israeli holding company may suffice?
Eighth, different rules target foreign professional companies (FPC) controlled 75 per cent or more by five or fewer Israeli resident individuals. These are foreign service companies. After the tax holiday is over, Olim resident individuals may face Israeli tax on deemed dividends at rates of up to 32%. Consider restructuring the service activity, various possibilities exist.
Ninth, as for trusts, in many cases, the trust may face Israeli tax on it profits if the settlor or a beneficiary were ever resident in Israel. An exception may apply if certain conditions are met, to the extent a beneficiary is an Oleh in his/her tax holiday. Specialist advice is needed to analyze the situation.
Tenth, for Olim with foreign pension or retirement plans, can a lump sum be withdrawn and perhaps reinvested before the tax holiday is over?
Eleventh, some Olim are entitled to receive rent from real estate or royalties from an invention, book or oil partnership abroad. Can an upfront lump sum be received before the tax holiday is over?
The above is just for starters. Many more possibilities may exist, especially if pre-Aliya tax planning was done.
As always, consult experienced tax advisors in each country at an early stage in specific cases.