Do foreigners who immigrate to the land pay taxes in Israel? Many are unaware of that fact that after concluding the Aliyah procedure, new immigrants are exempt from paying taxes on all income and capital gains derived out of the country. This article presents a detailed explanation on Aliyah tax benefits by attorney Joshua Pex, a partner in our firm and an expert in Israeli immigration law.
BACKGROUND ON THE ISRAELI TAX SYSTEM
For many years, the Israeli taxing system has been a barrier for most New Olim and returning residents. For this reason, in the 1990’s, the state of Israel introduced some changes to improve the fiscal policy in order to encourage and facilitate the immigration of Jews, almost 30 years ago, the government published the Amendment to the Income Tax Order (Amendment 168).
Besides granting a range of exemptions and tax benefits for new immigrants and returning residents, the legislation also defined who would be entitled to take advantage of it. To be specific, the Ministry of Aliyah and Integration classified, through the Amendment, the Olim who can benefit from the reform in three categories.
WHO CAN BENEFIT FROM THE TAX EXEMPTION
Firstly, there are the New Olim, which are the new immigrants becoming residents of the State of Israel for the first time. Secondly, there are the returning residents, that can be divided into “seniors” and “regulars”. The first category would be an Israeli citizen who lived abroad for at least ten years, being effectively considered a new immigrant. The second category could be described as an Israeli citizen who lived outside the country for at least six years.
Last of all, there was a one-time measure for people who used to live outside of Israel and returned during the years of 2007-2009, even if lived continuously out of the country for at least 5 years. Those people are also entitled to the Aliyah tax benefits listed on the next topic.
Nowadays, all new immigrants and returning residents, either non-resident for at least 10 years before returning or non-residents for 5 years that returned during 2007-2009, were given an exemption from both paying tax and reporting their income earned from outside Israel.
WHAT ARE THE BENEFITS?
With the aim of encouraging immigration and the return to Israel for those eligible for Aliyah, the government has granted an extensive range of benefits. The income tax reform awarded some bonuses and removed bounds to new immigrants and returning residents.
In addition, the exemption from taxation and reporting to the authorities can be from five to ten years from the date of the Aliyah or of the return to Israel, depending on which category the immigrant fits in. During this time, new immigrants are exempt from paying taxes on active and passive incomes derived outside of Israel, including not only interest, dividends, allowances, royalties, rent from properties, but also capital gains from the realization of assets and investments abroad, or from current income abroad.
Furthermore, the advantage can also be explained by the exemption from declaring on foreign sources, including not only business incomes generated by assets held overseas but also labor incomes, such as salaries, interest, rent, and income from activities of an independent nature generated abroad.
TAX ON FORIGEN COMPANIES OWNED BY NEW IMMIGRANTS
Beyond all of the Aliyah tax benefits listed above, companies established outside of Israel also are exempted from paying taxes during ten years. After that period of time, they start to fit into the definition of a resident Israeli company, having to pay taxes. Furthermore, the registration of foreign companies can be done in three different ways, which would be as a Subsidiary Company, a Branch Office or a Representative Office, depending on the business plan.
Firstly, there are the subsidiary companies, that are incorporated firms whose majority shareholder is another local or foreign company. Even if the foreign is the only shareholder, they are considered separate entities. For this reason, the liabilities applied to it cannot be extended to the parent company. In this case, the subsidiary may be treated as an Israeli company and as such eligible for tax exemptions and incentives available to local companies.
Alternatively, there are the branch offices, which are registered legal entities identified as extensions of the foreign company. For this reason, they aren’t eligible to the exemptions and incentives provided to local Israeli companies. As a result, setting up a branch office is a less attractive option for small to mid-size businesses.
Last of all, there are the representative offices, that are short term arrangements advisable when a foreign company wants to gather market intelligence or coordinate activities without any profiteering motive. In general, those offices cannot continue its operations beyond a short period and must upgrade itself to a branch office or subsidiary.
TAX CREDITS FOR WORKING OLIM
Olim working in Israel can benefit from a decreased income tax during the first three and a half years following their Aliyah. Therefore, the reduction is as follows: 3 additional credit points, during the first 18 months, 2 additional credit points, during the following 12 months and 1 additional credit point, for the following 12 months.
Aliyah tax benefits can be extended under two circumstances, either the immigrant is carrying out compulsory army service or studying at university or college.
OTHER BENEFITS FOR NEW IMMIGRANTS TO ISRAEL
Besides that, the Israeli government also grants a discount of 70–90% on arnona payments for Olim, on properties that exceeds 100 Sq. meters. Additionally, new immigrants also have the benefit of not paying taxes for importation of appliances and household goods brought from other countries. To sum up, Olim can also take advantage of paying a reduced tax when purchasing a new car in Israel or on the import of a car from abroad.
CHOOSING AN ADJUSTMENT YEAR – OPTIONAL ROUTE
For those interested in this, it is possible to request an adjustment period of one year from the day of arrival in Israel, which will allow an individual to choose not to be considered a resident of Israel for tax purposes during this period. The application for the adjustment year must be submitted within 90 days from the date of arrival in Israel, the Aliyah tax benefits will begin after the end of the period.
As a consequence of not being considered an Israeli resident, double taxation treaties won’t be applied to new immigrants. Furthermore, those who applied for the adjustment year will be entitled to exemptions granted for foreign residents, such as exemptions from capital gains and incomes gained from the interest of a bank deposit in a foreign currency. Besides that, the holding of an individual in a company will be considered as a company in the possession of a foreign resident. To sum up, no exit tax will be levied on an individual who left Israel before the end of the adjustment year. In conclusion, new immigrants and returning residents won’t be entitled to credit points given to a resident of Israel.
CONTACT AN ATTORNEY SPECIALIZING IN ISRAELI IMMIGRATION
New immigrants and returning residents to Israel can take advantage of a wide range of tax benefits. If you have any questions or need assistance on this issue, we will be happy to help.
Our law firm, with offices in Jerusalem and Tel Aviv, specializes in Israeli immigration law and represents clients before the Interior Ministry, the authorities and the courts in application procedures to obtain legal status in Israel. Our attorneys will readily provide you with comprehensive and professional service on any issue. Contact us for any questions.