Immigration to Israel: Tax Update

Tax Benefits|Returning Residents|New Immigrants|CFC Rules|Trust

July, 2012

The Israeli parliament approved a broad tax reform that will have an effect on the tax benefits granted to Senior Returning Residents (Toshav Hozer Vatik) and new immigrants (New Olim). These changes were implemented in Israeli tax law by the Law for the Change of National Priorities (Legislative Amendments for Achieving Budget Objectives for the Years 2013 and 2014).

Senior Returning Residents and New Immigrants are entitled to the following main benefits:

Senior Returning Residents and New Immigrants are tax exempt in Israel, for ten years, on their foreign-sourced income and capital gains from the sale of foreign assets.
Foreign companies held by Senior Returning Residents and New Immigrants will not be considered ‘managed and controlled’ from Israel for ten years.
Senior Returning Residents and New Immigrants are considered foreign residents for the purposes of the two main anti-deferral regimes in Israel, the The Israeli CFC Rules and the Foreign Professional Company regime.
Senior Returning Residents are not required to file reports, annual tax returns or capital declarations, provided that the Senior Returning Residents have no Israeli-source income and holds no shares in an Israeli company (See more on this tax benefit below).

Israeli 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. The original legislation included a proposal to eliminate 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. However, in the end, this proposal was taken out of the legislation, with the intent to push this proposal in a later date. See also: Israeli Taxation of New Immigrants: Proposed Changes

Israeli anti-deferral regimes

The original version of the proposed legislation suggested also making changes to the tax benefits regarding the Israeli CFC Rules and the Foreign Professional Company regime.

The proposed law suggested to consider New Immigrants and Senior Returning Residents as Israeli residents for the purpose of determining the existence of a CFC or FOC. Generally, one condition that must be satisfied for a foreign company to be a CFC or FOC is that more than 50 per cent or 75 per cent (respectively) of its means of control is held by Israeli residents. New Immigrants and Senior Returning Residents are considered foreign residents and their immigration does not affect the taxation of their Israeli partners in the foreign company. The original legislation proposed to treat New Immigrants and Senior Returning Residents as Israeli residents when calculating the percentage of Israeli means of control, potentially subjecting the other shareholders to the anti-deferral regimes.

Israeli Tax Law related to Trusts

The new Israeli tax law provides that trusts established by New Immigrants and Senior Returning Residents will be entitled to the benefits only to the extent that all the beneficiaries of the trust are new immigrants. Note that trusts settled by New Immigrants and Senior Returning Residents who arrived in Israel before 1 August 2013 will be entitled to the benefits as long as those new immigrants are alive. The new Israeli trust regime will come into force on 1 January 2014.