israeli tax benefits for new immigrants and veteran returning residents

8/14/2019 Israeli Tax benefits for New Immigrants and Veteran Returning Residents

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Israeli Tax benefits for NewImmigrants and VeteranReturning Residents

Iddan Dinai, Adv.Tax Partner, Barnea & Co.



Law Definition of an Israeli resident

Section 1 of the Israeli Income Tax Ordinance –1961, defines an Israeli resident as:

An individual whose center of life is in Israel

The entirety of the individual's family, economicand social ties should be considered, including:

• The individual’s place of permanent home

• His and his family's dwelling

• The individual’s permanent place of being employed or thepermanent or ordinary place of occupation

• The individual’s place of active and substantial economic interests

• The individual’s place of activity in organizations, associations orother institutions

Iddan Dinai,

Adv.



Quantitative Presumptions

A presumption that the center of an individual’slife is in Israel applies if:

• The individual stayed in Israel during the tax year for aperiod of 183 days or more; or -

• The individual stayed in Israel during the tax year for aperiod of 30 days or more and the total period of hisstay in Israel in the current tax year and the two yearspreceding it is 425 days or more.

• The presumption could be rebutted by either the

individual or the Assessing Officer• Exceptions: an employee of the State of Israel, an

Israeli Municipal authority, the Jewish Agency, etc.

Iddan Dinai,

Adv.



Qualitative Tests

The ultimate test – the center of life test:

• Examination of the overall family, economic andsocial ties to Israel in light of individualcircumstances (Gonen High Court ruling )

• Non formal rather than quantitative examination

• Objective test – location of the majority of anindividual’s relations (physical examination)

• Subjective test – the location the individual

perceives as his center of life (examination of intention)

Iddan Dinai,

Adv.



Effective Date of Becoming anIsraeli Resident

• Specific date or entire tax year?

• Numerous tax resolutions indicate a tendency toattribute the change in residency to thebeginning of a specific tax year, unlesscircumstances explicitly indicate that the changein residency can be attributed to a certain date ormonth

• Under the Tax Authority’s guidelines , the earliestof the following should be regarded as the arrival

date:• Date of Aliya under Ministry of Absorption criteria

Iddan Dinai,

Adv.



Effective Date of Becoming anIsraeli Resident (Cont.)

• The first day a permanent home wasavailable in Israel for the new-comer andhis arriving family members, and if he is

single the first day a permanent homewas available for him while in Israelwhile not having another permanenthome outside Israel.

• The first day in Israel in a tax year in

which the new-comer eventually stayedin the aggregate more than 183 days

Iddan Dinai,

Adv.



Dual Residence and "Tie-Breaker" Rules

Tie-Breaker rules under the Conventionbetween the State of Israel and theKingdom of Belgium for the Avoidanceof Double Taxation with respect to

Taxes on Income and Capital (the“Treaty”):

Dual residence might arise under Article4(1) of the treaty that stipulates:

“Resident of a contracting state"

–anyperson, under the laws of that state is liable

to tax therein by reason of domicile,residence, place of management or anyother criterion of similar nature”

Iddan Dinai,

Adv.



"Tie-Breaker" Rules

Article 4(2) hierarchal tests:

• Permanent home available

• Center of vital interests

If a permanent home is available in bothstates – deemed to be a resident of the statewith which his personal and economicrelations are closer

• Habitual abode

If center of vital interests cannot bedetermined or if the individual has nopermanent home available to him – he isdeemed to be a resident of the state in whichthe individual has an habitual abode

Iddan Dinai,

Adv.



"Tie-Breaker" Rules (Cont.)

• Nationality

If the individual has an habitual abode inboth states or in neither of them – he is

deemed to be a resident of the state of which he is a national

• If an Individual is a national of bothstates or of neither of them – the

competent authorities of the contractingstates shall settle the question by mutualagreement

Iddan Dinai,

Adv.



Expansion of Tax Benefitsunder Amendment 168 of the

Income Tax Ordinance • Additional tax benefits applicable to new immigrants

and veteran returning residents (“Eligible Individuals”)under Section 14 of the Income Tax Ordinance:

• Tax exemption on business and foreign employmentincome generated outside Israel for a period of 10years

• Tax exemption on capital gains on the sale of non-Israeli assets for a period of 10 years, includingassets purchased after the immigration date. A partial

linear exemption shall still apply after the 10 yearperiod.

Iddan Dinai,

Adv.



Expansion of Tax Benefits(Cont.)

• An Eligible Individual will not be considered a"controlling shareholder" of a "Controlled ForeignCompany" as defined in Section 75B of the Income

Tax Ordinance – a tax benefit in relation toimputed dividend income deriving from passiveincome of a foreign company

• Tax benefits relating to foreign trusts

• Tax exemption for income attributed to an EligibleIndividual deriving from a “Foreign OccupationCompany” as defined in section 5(5) of the Income

Tax Ordinance for a period of 10 years

• Please note – determination of the effective dateof becoming an Israeli resident is critical.

Iddan Dinai,

Adv.



Adjustment Period

An Eligible Individual may elect, 90 daysfrom his arrival date, not to be consideredan Israeli resident for tax purposes for aone year adjustment period, commencing

the date of arrival to Israel. The AdjustmentPeriod will be counted for the purpose of any exemption period, should he stay inIsrael.

Iddan Dinai,

Adv.

A F i C



A Foreign Companycontrolled and managed in

Israel• A foreign company controlled and managed in

Israel is usually regarded as an Israeli residentcompany for tax purposes

• Following Amendment 168 , a foreign companycontrolled and managed in Israel by an EligibleIndividual (the “Controlled Company") will notbe deemed for a 10 year period as an Israeliresident company for tax purposes

• An exception applies in relation to a foreign

company whose operation could not existwithout having its business activity controlledand managed in Israel

Iddan Dinai,

Adv.



Foreign Company (Cont.)

• Non-Israeli source income of a foreigncompany managed and controlled by anEligible Individual will not be subject to

Israeli corporate tax for a period of 10years

• Interest and dividend income derived by

the Eligible Individual from suchcompany will also be tax exempt for aperiod of 10 years

Iddan Dinai,

Adv.



ILLUSTRATION OF HOLDING ALTERNATIVESTRUCTURES

New “Oleh”

Dividend A Dividend B

Foreign company A Israeli company CForeign company B

Israeli Source Income Foreign Source Income World Wide Income

Dividend C



Iddan Dinai,

Adv.

Thank you for your

attention

israeli tax benefits for new immigrants and veteran returning residents

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