Israeli Taxation of New Immigrants: Proposed Changes
 

Returning Residents| Senior Returning Residents 

Dr. Avi Nov, Adv.    

July, 2013   

A new Israeli law proposes various changes to the taxation of New Immigrants (Olim) and Senior Returning Residents (Toshav Hozer Vatik) in Israel. The proposed changes are included in the Bill for the Change of National Priorities (Legislation Amendments for the Purpose of Achieving the Budget Purposes for the years 2013 and 2014). The main changes that are included in the new Israeli law with respect to the taxation New Immigrants and Senior Returning Residents are as follows: 


Reporting Obligations

Under Israeli tax law, New Immigrants and Senior Returning Residents are not subject to Israeli reporting obligations with respect to their foreign source income and assets for a period of ten years. However, the new Israeli law proposes to abolish this relief and to require New Immigrants and Senior Returning Residents to report their foreign source income or assets regardless of any tax exemption to which they are entitled. Apparently, this change will only apply with respect to New Immigrants and Senior Returning Residents who arrived in Israel only after the new proposed legislation turns into law. 


Taxation of Dividends

The new Israeli law proposes that if a dividend has been distributed by a foreign company to New Immigrants and Senior Returning Residents, but was distributed from income which was derived in Israel, then such a dividend will not be classified as foreign sourced income, and accordingly, will be subject to Israeli taxation.
 

CFC Exemption

New Immigrants and Senior Returning Residents are not subject to the The Israeli CFC Rules and the Foreign Professional Company regime, and the new Israeli law does not propose to change this. However, the new Israeli law makes a significant change regarding the way in which the New Immigrants and Senior Returning Residents affect their Israeli partners in the CFC and the FPC. 

One condition that must be satisfied for a foreign company to be a CFC or FPC is that more than 50% or 75% (correspondingly) of its means of control are held by Israeli residents. 

The term “means of control” include: (i) the right to participate in the profits of the foreign resident company; (ii) the right to appoint a director to the foreign resident company; (iii) voting rights; (iv) the right to receive a portion of the balance of assets of the foreign resident company upon winding-up; and (v) the right to direct a person vested with one of the rights referred to in (i)–(iv) above as to how such right may be exercised; 

According to current legislation, New Immigrants and Senior Returning Residents are considered as foreign residents and therefore their immigration to Israel does not affect the taxation of their Israeli partners in the foreign company. The new Israeli law proposes to treat New Immigrants and Senior Returning Residents as Israeli residents when calculating the percentage of Israeli means of control and not to treat them as foreign residents.
 

See also:

Tax benefits to new immigrants and returning residents

Update on Israeli Tax Benefits for Returning Residents and New Immigrants


Dr. Avi Nov Law Offices, Israeli & international tax law 
*This article is intended for informative purposes only and is in no way to be construed as tax advice or a legal opinion

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