Due to the recent developments with respect to Israeli Returning Residents and New Immigrants (or “Olim“) tax reform and the significant potential implications of this reform, we decided to provide a recent update on the draft legislation, in addition to our comments. This is following our detailed reference on our Tax Alert No. 1 and due to the high interest of clients and colleagues on the issue.
The benefits: on August 18, 2008 the Kenesset (the Israeli Parliament) Immigration committee has authorized the final draft of the tax reform of Israeli Returning Residents and New Immigrants. This reform contains considerable tax benefits to eligible individuals. The draft provides for an extensive tax exemption and a waiver of any reporting requirements associated with eligible income and gains of Returning Resident (i.e., former residents who resided out of Israel at least 10 years) and Olim, for a period of 10 yeas. Exempt income includes any income, from passive as well as active sources, including income from occupation and employment income, as long as such income is sourced out of Israel.
Applicability on Israeli Returning Residents: a Returning Residents will enjoy similar benefits as a New Immigrants, provided that he resided out of Israel for a minimum period of 10 years.
According to a transitional provision (proposed to apply until December 31, 2009), a Returning Resident that resided out of Israel only for a period of 5 years may still be eligible for these benefits, provided that he was not an Israeli resident on January 1, 2007. It should be noted that the residency test and the determination of one’s residency is a complicated test that takes into account legal definitions and parameters as well as the specific facts of each case.
However, the requirement for the status of a “regular” returning resident (i.e., former Israeli residents that do not meet the 10 years residency abroad test) have been tightened, to include only returning residents who resided abroad for 6 years and not for 3 years, as under the current law.
A change in the definition of an “Israeli resident”: according to the draft, an Israeli resident who resided out of Israel for a period of 4 continuous years and on the last 2 years his center of life was out of Israel, may be considered as a “foreign resident” for Israeli income tax purposes, but only if he stayed in Israel less than 183 days in each of the first 2 years. According to our view, the above may have positive implications and should not be viewed as carrying adverse implications only.
A one-year “adaptation period”: in order to enjoy this option, one should send an application to the ITA within 90 days from his day of immigration to Israel.
As a final remark we emphasize again that the waiver of any reporting requirements associated with eligible exempt income has extremely significant implications on Returning Residents and Olim. We hold the view that the draft reform requires a close examination by potential immigrants in order to wisely plan their steps. In addition, possible implications in relation to trusts and transparent entities should also be carefully addressed in order to achieve optimal tax results.
