Amendment No. 168 to the Israeli Income Tax Ordinance (“ITO“) was finally enacted on September 16, 2008 (the “Amendment” or “Reform“). As we previously detailed, the Reform provides significant tax benefits to New Immigrants “Olim“) and former Israeli residents who resided at least 10 years outside Israel (“Long-Term Returning Residents“). Below we have outlined the main aspects of this tax Reform, as included in the legislation.

A special “window of opportunities”

This almost ending period is offered to  former Israeli residents that will  returns to Israel until 31.12.2009; those may enjoy similar tax benefits as “Long-Term Returning Residents” provided they have been foreign residents for at least 5 years prior to their return to Israel;

Individuals eligible for the extensive benefits package

• “Israeli Resident for the First Time” – An individual that was never a tax resident of Israel;
• “Long-Term Returning Resident” – a former Israeli resident individual returning after being a foreign resident for at least 10 years.

Complete income tax exemption

Full exemption may apply to all types of foreign-sourced income:

• Passive income and capital gains deriving from foreign assets (including those acquired after immigrating to Israel);
• Business income and income from employment and professional services carried outside ofIsrael);

Extension of exemption period

• Eligible individuals may enjoy a tax exemption for a period of 10 years from the day of establishing Israeli residence (the one-year adaptation period is counted for this purpose).
• Prior to the Amendment – the exemption period was 5 or 10 years.

Waiver of any reporting or tax filing requirements

• Annual tax returns – related to foreign sourced exempted income only.;
• Declaration of capital – with respect to foreign assets only.
• Settlor’s notice regarding the settlement of a trust or transferring an asset thereto (foreign assets only).

One-year “adaptation period” is provided

• An individual may elect not to be considered an Israeli tax resident in the first year of residence in Israel. This year, however, is included within the 10 years of exemption.
• A notice on the election must be submitted to the authorities (within 90 days upon arriving toIsrael).
• At the end of the adaptation year, the individual may leave Israel without triggering Israeli tax implications.

Effective Date

• The Amendment applies as of 1.1.2007 and in relation to individuals who become Israeli tax residents from this day onwards (certain provisions carry a different effective date).

Secondary benefits package

• Offered to a “Returning Resident”, i.e.: former Israeli resident returning to Israel after being a foreign resident for at least 6 years. The 6 years requirement pertains to individuals who ceased to be Israeli resident as of 1.1.2009.
• Under a transitional provision, a period of 3 years (the period required prior to the amendment), will continue to apply to those have ceased to be Israeli resident prior to 1.1.2009.
• 5 years tax exemption for passive income (including interest and dividend from traded securities within “a closed bank account”);
• 10 years tax exemption for capital gains (including from traded securities within “a closed bank account”);
• Pertains only to income from foreign assets acquired while being a foreign resident.