By: Eli Doron, Adv; Yaron Tikotzky, Adv, (C.P.A); Dr.Slomo Nass, Adv, (C.P.A)
There is no doubt that the essence of the new proposition made to the Knesset Assembly, as brought and analyzed in this article, is to encourage quality immigration to Israel. Being that as it may, this proposition shall create a negative result wherein new comers will hold off patriotism in order to enjoy the benefits of the new proposition.
The proposition, initiated by the Israeli Ministry of Immigrant Absorption and the Israeli Taxes Authority in the conjoined program ‘Coming Back Home for Israel’s 60th Anniversary’ and in view of Treasury Minister, Mr. Ronnie Bar-On, to adopt the joined recommendations of the Ministry of Immigrant Absorption and the Taxes Authority, began to materialize (Confirmed in the Ministers Conference for Legislation on 15 May 2008) and was initially verified by the Knesset on 7 July 2008 under rule of 1st vote (hereinafter: ‘the bill’). The aim of this bill is to grant a series of tax alleviations for new comers and returning citizens on the occasion of Israel’s 60th anniversary and, thus, strengthening the State of Israel as the national home of the Jewish people by removing the tax barriers from making Aliya.
The Bill’s Highlight
Returning Senior Resident
In accordance with Section 14(a) to the Income Tax Ordinance, HaTashka-1961 (hereinafter ‘the Ordinance’), a New Comer s an individual who became an Israeli resident (hereinafter ‘New Comer’) for the first time. In Addition the to the New Comer, it is proposed to make an analogy, for tax purposes, between a New Comer to an individual permanently residing outside of Israel in the past 10 years, out of which 8 years after ceasing to be an Israeli Resident (hereinafter ‘Returning Senior Resident’)
We should already emphasize that it is expected that all Israeli civilians who are non-Israeli residents and which do not fulfill these conditions, will prefer to await until such conditions mature with respect to them, in order to benefit of the special tax alleviations.
Special Tax Alleviations
A. Extending the Tax Exemption term and Exempt Income Bases.
Nowadays, New Comers enjoy a Tax Exemption for 5 years from the day of becoming Israeli Residents with respect to passive income such as interest, dividends, governmental allowance, royalties or income deriving from rent charges on assets outside of Israel and remained in their possession after becoming Israeli Residents, unless received from and occupation or business and/or asked otherwise. Additionally new comers enjoy a 4-year tax exemption on profits deriving from businesses possessed at least five years ere becoming Israeli Residents.
With respect to capital profits, the current law states that a new comer is exempt from tax from capital profit deriving from selling a foreign asset within 10 years after becoming an Israeli Resident. A Returning Resident is exempt for taxes on capital gain deriving from selling a foreign asset before returning to Israel.
The Proposed Amendment¬
It is proposed to extend the tax exemption so it will apply to Returning Senior Residents and not only on New Comers and that this exemption shall be granted on additional income bases as described in Section 2, Section 2A and Section 3 to the Ordinance (including capital gain) for a period of 10 years.
B. Alleviation in the Effective Control and Management Criteria for ‘Association of Individuals’ residing in Israel.
Currently, an Israeli Corporation is either a corporation incorporated within Israel or a corporation of which control and management are operated from within Israel.
The Proposed Amendment
It is proposed that when the effective Control and Management of the Israeli Corporation is operated by a New Comer or a Returning Senior Citizen within 10 years of the date of becoming Israeli Resident, the Israeli Company shall not be considered as an Israeli Resident for taxation purposes.
C. Discount on Taxation of Pension
Currently, in order to facilitate conditions for New Comers and prevent deprivation in their economic status with respect to the grant they receive for moving to Israel is was decided that the tax rate a new comer shall pay for a pension originating outside of Israel for their employment outside of Israel, shall not increase the applicable tax rate of the originating country. This alleviation apply to any annuity/pension paid by the foreign employer, pension fund and/or any allowance paid for loss of working ability.
The Proposed Amendment
It is proposed that, once the above-mentioned alleviations expire, the Tax Exempt Sum for Returning Senior Residents and New Comers will be identical to the allowances paid up to ILS 7,200 per month in the 2008 Tax Year (ILS 7,000 in the 2007 Tax Year).
According to the current status, New Comers asking for a Tax Alleviation on such a foreign income are requested to prove the foreign tax rate (‘theoretical tax’ in the language of the commentary on the proposition), using a large number of documents.
D. Granting One Year Accommodation Term
The current law does not recognize the arrangement of Accommodation Year. The Accommodation year is a new creation in the bill, in which it is proposed to determine that a New Comer or Returning Senior Resident shall not be viewed as Israeli Residents for a term of one year since of their arrival in Israel. New Comers and Returning Senior Residents must inform the Income Tax Assessor of their wish to be included in this arrangement within 90 days of their arrival. This Accommodation Year shall be taken into account with respect to the 10 years tax exemption.
In the 1st vote in the Knesset, the Justice Ministry has recorded an objection to said bill, claiming it is prejudicial and non-egalitarian with respect to baring the weight of tax between New Comers & Returning Senior Residents and ordinary residents. The Ministry wonders weather this is indeed necessary to achieve the goal of the bill. However, the Legal Advisor to the Government claims there is no legal prevention to confirm this bill, and the Budget Commissioner in the Treasury Ministry supports this conclusion.
In conclusion, we shall mention that in addition the above-mentioned, it is likely that people shall prefer to hold off their Aliya in view of the bill and the state budget shall suffer losses estimated at millions in the 2008 Tax Year together with an estimated increase in such losses in the following years of anywhere between ILS 100 Million to ILS 150 Million.
We believe that in spite of the objection made by the Ministry of Justice, this bill shall mature into a law and thus, advise Israelis outside of Israel to seek individual tax consultation, before rushing into making an Aliya, in order to optimally utilize the wishful alleviations in this bill in a manner which correspond with the law and common sense.