A relentless wave of antisemitism is rising in Europe, the United States, and other countries around the world. At the same time, there is a rising tide of self-identification and empathy from the Jews of the Diaspora generated by the Black Saturday Massacre and the subsequent "Iron Swords" War. Many have returned to the Jewish Homeland, and we are looking forward to a deluge of immigration to Israel, in line with the report of YNET from 11/07/2023: "Over 331 thousand Israelis have returned to Israel since the war broke out on October 7th". The accountant Rotem Abraham Sol, from the Shtainmetz Aminoach & CO Certified Public Accountants, present taxation issues returning citizens may face.
What are the differences between a returning resident, a veteran returning resident, and a new immigrant?
The State of Israel defines three groups:
Group A: Israeli citizens who resided outside of Israel for up to 6 years. This group is not entitled to any tax benefits.
Group B: A returnee resident – an Israeli citizen residing out of Israel between 6 years and 10 years. This group enjoys certain limited tax benefits.
Group C: A veteran returnee resident or a new immigrant- A veteran resident returnee is a citizen who has resided out of Israel for over ten years and a new immigrant who is an individual who is not an Israeli citizen who is entitled by the power of the Law of Return to immigrate to Israel and who has not lived in Israel in the past. This group enjoys extensive benefits and exemptions versus the Israel Tax Authority.
Regarding group C', in addition to tax remittance benefits, this group is entitled to, which is detailed below, and this group is also entitled to an exemption from filing income tax reports for ten years, an exemption that is just as important and perhaps even more important in many cases.
An adjustment year for returnee residents
When a new immigrant or veteran returnee resident immigrates to Israel, it is recommended they declare an adaption year to the Income Tax Authority. This is a method to protect the new immigrant or returnee, enabling him to continue to be considered a foreign resident for the purposes of income tax for 12 months from the moment he immigrates to Israel, should he decide to leave. In other words, should he leave Israel again due to adaptation difficulties during these 12 months? Thus, it will be like he never returned to Israel, which would have especially important consequences and ramifications.
For example: A veteran resident returnee who has lived abroad for 13 years before returning to Israel who has, for whatever reason, decided to return abroad after six months of living in Israel, and after another period of five years abroad, decided the time has come for a permanent return to Israel, and now wishes to make Aliyah. Had he failed to declare an adaptation year during his time of residence in Israel, the authorities would have viewed him as a foreign resident for only five years, rather than recognizing his cumulative 18 years abroad had he made such a declaration. Thus, the extensive tax benefits he might have received would no longer be possible for him. Hence, it is important to consult with an accountant who specializes in taxes for general and returning residents of any sort.
What tax benefits are veteran returning residents and new immigrants entitled to?
Returning residents are entitled to tax benefits from the day of their return for a period of 10 years. These tax benefits are regarding passive income from abroad. In other words, a tax exemption exists for capital gains which derives from the sale of foreign assets, even if they have been purchased following the return to Israel, and for any other passive income such as interest and dividends. This is a significant benefit which means non-payment of taxes for the entirety of the assets and investments accumulated in the past and in addition the benefit applies to the aforementioned assets that are purchased during the next ten years following immigration to Israel.
Another type of income is active income, and many tend to think it is also tax exempt in full. However, this is not accurate. Should an individual operate a foreign business within the country, in other words he is physically present in Israel and operating his business abroad, he must pay taxes in Israel. This subject is extremely complicated but there are solutions to enable reaching the optimal tax results by attributing the income derived in Israel versus the tax income produced abroad. The position of the Israeli tax authority is that the attribution be performed in accordance with the number of days worked in each residence. We understand that such an attribution might result in a distorted and a heavier tax burden. Hence, our position is that it is necessary to examine which attribution better reflects the true Income derivation, leading to a reduction of the tax burden.
There is one more thing. Should our customers possess a foreign company overseas, there are incredibly significant tax ramifications on how their income shall be received from the company (for example, a dividend or receipt). Hence, it is particularly important to consult with a specialized accountant in the field. Click here for more information on international taxation .
Returning resident (6 to 10 year stay overseas)
For ordinary returning residents, there are tax benefits, but they are lesser than those listed above that veteran returning residents and new immigrants are entitled to. The first difference is that a returning resident does not have any exemption from filing income tax statements to the income tax authorities.
Another difference is that no exemption exists for paying taxes on active income – only on passive income. The third difference is that the exemption received from income tax is only for assets purchased prior to making Aliyah to Israel, up to a day prior to the date of immigration.
- Please note – for foreign residents who arrive in Israel especially to serve in the reserves, the duration of their stay in Israel will not impair the calculation of their length of residence abroad for the purpose of receiving a returning resident status in the future. Click for more info on returning residents (in Hebrew)
The topic of returning residents and new immigrant taxation is extremely complex and is open to interpretation. For example: the date of immigration to Israel and the date of departure (based on solid facts) are "flexible" and subject to different interpretations, therefore, in order to get the most favorable tax result, you must consult with an expert CPA. Our recommendation is to "prepare the ground" for your return to Israel.
To coordinate a meeting concerning returning residents, please contact Shtainmetz Aminoach & CO Certified Public Accountants.