Tax Planning

A full explanation of taxes as they relate to potential olim from across the world is impossible, so instead we’ll try to accomplish two main objectives: (1) to raise tax issues that need to be considered prior to Aliyah; and (2) to give some background on the structure of the Israeli tax system, in order to enable you to start adjusting your financial structure to the new reality.

Do not make any firm decisions based on the limited information presented here. Rather, use this as a starting point to work with your accountants, tax professionals, and financial planners to best manage your transition. This chapter is not a comprehensive evaluation of all possible tax consequences: the tax codes are so complex that even one small change in your circumstances can significantly affect the ways the laws might impact you. Don’t extrapolate from other cases; consult a professional!

For Americans

American citizens encounter a unique tax situation outside of the United States: Americans are required — whether they live in the United States or not — to file tax returns and report worldwide income for as long as they are citizens (unless, of course, you renounce your citizenship — a growing phenomenon). This means that even post-Aliyah, all American citizens are required to have a relationship with the IRS, thus explaining the high number of American accountants living and practicing in Israel. Your tax structure prior to Aliyah will remain in place until it’s changed, so it’s important to structure things correctly. Here are a few basic points to consider. (This list is by no means exhaustive.)

Americans residing outside of the United States who start filing as nonresidents are no longer obligated to pay state and city taxes, but must file US federal tax returns as nonresidents.

A US taxpayer who owns a foreign account (or has signatory rights on a foreign account) valued at more than $10,000 at any point in time during the year is required to file a Foreign Bank Account Report (known as the FBAR). This form must be filed by June 30 for accounts held in the previous year. Failure to file this report may result in significant fines.

According to the Israel/US Tax Treaty:

Americans receiving social security payments while living in Israel do not pay taxes on this income in either country (a unique circumstance here in Israel).

Similarly, US federal, state, and city government pensions are tax-free in Israel, though they remain taxable in the United States.

Other US pensions, including IRA and 401(k) pension accounts, are first taxable in Israel, followed by which a credit can be claimed on one’s US tax return for taxes paid in Israel.

As a special rule, Israeli taxes will not exceed US tax payable on US retirement income, if the taxpayer made Aliyah and the retirement income is from work prior to Aliyah.

For Non-Americans

Non-Americans, including those coming from Commonwealth countries, who leave their home countries and declare themselves to be nonresidents, are generally regarded as having severed their tax ties with their home countries. They are not obligated to continue filing income tax returns and paying taxes to their home countries.

However, if you continue to own property or other assets (businesses) in the old country, or continue to have residential ties (including medical, social, and professional ties) to it, your tax connection there may require coordination with your tax position in Israel (in addition to the various investment and currency related issues discussed in the section “Asset Management in Israel”). Non-Americans in this situation need to get expert advice and carefully plan how and when to sever their ties with their home countries — the exact timing can make a significant difference.

If you’re planning on taking your assets out of your home country, many countries consider them to be sold at fair market value and thus require taxes to be paid on gains before you leave the country. If you’re planning on selling your assets, whether they are retirement savings plans or physical assets, plan the most tax favorable strategy before you become a nonresident. As always, whether closing up a business in your home country or continuing to operate one, tax guidance should be sought.

Often it is worthwhile to set up a tax plan prior to Aliyah, especially with regards to securities, real estate, companies, trusts, and Israeli investments held before the move. Consult a licensed investment professional regarding the exact composition of your investment selection. Estate planning, wills, and trusts need to be assessed and adjusted as necessary.

Double Taxation

It is critical to avoid double taxation on assets that remain in your home country. Double taxation often occurs when assets are taxed in different ways in different countries.

For example, imagine that you have an asset that is taxed as ordinary income in country A, but taxed as a capital gain in country B. Country A may not recognize that the “capital gain” tax paid in country B was payment of the tax country A feels is necessary. In certain cases, double taxation can mean much higher joint tax rates than that which you would pay in any single country alone. Advanced tax planning strategies may be necessary to avoid double taxation and to even provide significant reductions in tax rates for both Americans and non-Americans who become residents of Israel.

Becoming an Israeli Tax Resident

Where you reside (not your status as an Israeli oleh or citizen) is of critical importance to your tax situation. Residency is determined by criteria that revolve around your “center of life.” Wherever your permanent residence, family, business, economic, and social interests reside, you will usually be considered a resident.

People who reside in Israel for at least 183 days (over half of the calendar year) or for at least 425 days over three years, including 30 days in the current year, are presumed to be Israeli tax residents, under most circumstances. The taxpayer has the burden of proof to prove otherwise. Losing this tax status is not immediate when you leave the country.

Israeli tax form 1348 must be filed in borderline cases when the taxpayer claims to be foreign resident but visits Israel over 183 days in a year, or 425 days in any three year period.

The form gives the ITA considerable details about the individual’s center of living in addition to other information. The form asks for factual information about the number of days the taxpayer spent in Israel and whether the taxpayer is resident of any other country.  Confirmation documentation must be attached to the form. If you are unsure how to complete this very detailed matrix, consult a professional.

To ease new immigrants’ integration into Israel and lighten their tax burden (both emotionally and in real terms), as of January 1, 2007, new immigrants received two significant tax benefits:

For ten years from the time of first becoming a resident of Israel, new immigrants are exempt from all taxes and reporting requirements on all foreign generated income and assets. Foreign generated income is any passive income (capital gains, dividends, interest income) earned from assets outside of Israel, and earned income (from a salary or business) generated outside of Israel. On the other hand, if you are telecommuting for an American company but physically located in Israel, it will be considered regular Israeli income, taxable in Israel.

A “year to decide rule” gives olim the ability to keep their foreign tax status during the first year they are in Israel. This rule provides great flexibility for the oleh to decide if he is staying in Israel, and then gives him time to structure his taxes prior to becoming an Israeli tax resident. This trial year does not delay the ten-year income exemption discussed above. However, during this initial year, tax benefits for olim will not be granted. Therefore, for example, to benefit from the reduction in real estate purchase tax for the oleh (0.5%, up to NIS 1,318,400), those who use the trial year should delay purchasing a property in Israel.

Foreign Settlor Trust / Israeli Beneficiary Trust

In August 2013 Israeli tax law as it relates to Foreign Settlor Trusts underwent a major reform.

The reality now is that if even only one of the trust’s beneficiaries is an Israeli tax resident the Foreign Settlor Trust is now taxable in Israel. Prior to this reform the Foreign Settlor Trust was exempt from tax in Israel, as it was considered a non-Israeli source income.

The Foreign Settlor Trust has been renamed the Israeli Beneficiary Trust, and any Israeli beneficiary is now subject to tax payments relating to any distribution of income he/she received from the trust.

If you established an existing trust, or are a beneficiary, you will need to consult with a trust and estate practitioner before making Aliyah in order to ensure you are fully aware of the ramifications of this reform.

Taxation of trusts established by olim

Olim who made Aliyah after August 1, 2013 and established trusts, are now only entitled to the new immigrants and senior returning residents’ benefits if all of the trust’s beneficiaries are foreign residents or new immigrants, and only on condition that the settlor is alive.

Settlors who came to live in Israel before August 1, 2013 have their trust tax-exempt as long as the settlor is alive, and up to the 10 year tax exemption plan for which the settlor is eligible.

Understanding the Israeli Tax System

In order to successfully integrate into Israel’s financial system, it’s necessary to understand how the Israeli tax system is structured. Major differences between your home country and Israel can lead to pitfalls — or, alternatively, tax planning advantages. In general, Israel’s tax code is much simpler than that of many other Western countries.

In Israel, income is divided between earned income and passive income.

Earned income

Earned income is taxed at a progressive rate, as seen here. Similar to most countries, the more you earn, the higher taxes you’ll pay on each additional shekel of earnings.

Fortunately, tax credits and income exemptions reduce the amount of tax that is paid. Each tax credit reduces taxes owed by NIS 218 a month (as of 2020). Every male is granted 2.25 tax credits, or a total of NIS 486, while every female is granted 2.75 tax credits, or NIS 594 of tax savings a month. So if a person’s monthly projected tax obligation is less than his tax credits, no taxes need to be paid at all. For salaried male workers who earn less than NIS 4,800 monthly (NIS 5,300 for women), the taxes due (as calculated in table below) will be less than the tax credits granted, which means that no income tax is owed to Mas Hachnasah (the Israeli Tax Authority).

In addition to the standard tax credits that reduce taxes owed, individuals may be eligible for additional tax credits, depending on their individual status and circumstances. There are various ways to earn additional tax credits. They include the following examples (this list is only partial):

New olim receive additional tax credits during the first three and a half years after making Aliyah. For the first eighteen months they receive three additional credits (reduction of NIS 648 per month), which then decrease by one credit during each subsequent twelve-month period.

Working mothers with children under the age of eighteen receive an additional one credit point for each child, and only half a credit point for each child in the year of birth and in the year that the child turns eighteen.

Working fathers with children three and under receive an additional two credit points (one credit during the year of birth and the year the child turns three) for each child.

Other beneficiaries of extra tax credits include:

Those who live in an economically preferred area of the country.

Soldiers who have recently completed their army service.

Single-parent families.

Parents with children who have learning disabilities.

People hospitalized during the year due to major illness.

Olim will pay taxes immediately if they earn above their specific personal income threshold. As outlined above, working as soon as you come to Israel offers maximum tax benefits, and understanding the system allows you to make proper planning decisions to minimize taxes. For example, Israel’s tax system encourages and even rewards women with small children to enter the workforce. As a result, if a family was considering whether to have the husband work more hours or to have the wife find a job, there is a strong incentive for the wife to work, all other things being equal.

Tax reductions (or credits on the amounts paid) are given for contributions to pension plans like bituach menahalim and kranot pensiah, as well as for keren hishtalmut savings plans,. All employees pay Israel national insurance tax (Bituach Leumi) and the national health tax (mas briyut), which is deducted automatically from the average employee’s salary, while employers pay an additional amount for Bituach Leumi.

Understanding the system is also critical in order to verify that your taxes are being calculated correctly by your employer — which is crucial in Israel since most Israeli employees rely on their employers to calculate their tax liability and then remit taxes to Mas Hachnasah on their behalf. Under most circumstances, employees are not required to file annual tax returns in Israel. If mistakes are made (most likely when basic information is not entered correctly by the employer), money could be lost — and there is no easy way of following the money flow if you don’t understand the system. So, for instance, ensure that your employer has defined you as being a new immigrant to receive all tax credits in the first three-and-a-half years in Israel.

The Israeli system is more complicated for people who work for multiple employers, because each one needs to calculate how much tax he needs to pay on your behalf. In order to determine the correct amount, the employee applies to Mas Hachnasah based on the projected income earned from each employer. Mas Hachnasah will then determine how much each employer should deduct in taxes from the employee. However, many times the amount earned will change over the course of the year, leaving the amount being remitted on your behalf as merely a best guess. To alleviate this problem and make sure the right amount was paid, hire an accountant to do a mockup of your tax return. If there was a mistake, file a year-end tax return and the money will be refunded.

There are other scenarios where you might want to file a year-end tax return, including if you weren’t employed for part of the year, if you were sick or disabled for a long period of time, or if you made donations during the year, for which you are entitled to a tax credit of 35% of the donation made to approved charities. For this reason alone, it can pay to file an annual tax return. Alternatively, you can apply to Mas Hachnasah before the end of the year for a tax credit based on your donations and receive a certificate to allow your employer to adjust the tax on your salary, thus avoiding the year-end tax return.

Tax implications for a small business owner

A small business owner needs to consider many nuances in terms of structuring the business and its income stream. The three most relevant options for olim are:

Working as an independent worker (atzma’i).

Setting up a company or a corporation and then drawing a salary.

Working for a manpower or outsourcing company that employs you and lets you run your business under the auspices of their organization.

All three options have their unique tax advantages and disadvantages (as discussed in the section “Israeli Job Market and Benefits”) that need to be considered carefully before deciding on the best way for you to run your small business. Consult a professional as necessary.

Passive Income

Passive income in Israel is taxed at a progressive rate of 25% – 32% – see Tax planning for tax breaks for olim. Interest from unlinked deposits (i.e., unlinked to the consumer price index) are taxed at 15%. And, just as employers remit taxes for their employees, banks and investment houses remit taxes for their clients who earn passive income from their investments.

Israeli tax law gives an exception on real estate income in Israel up to a specified limit (in 2020  NIS 5,100) per family unit, per month. Until you earn more than this limit monthly, you won’t need to pay any taxes. Above that limit, there are three different ways to calculate your tax liability. Consult your local accountant regarding the best way for you to reduce your taxes.

Israel gives real estate owners the ability to sell one property every four years tax-free. If the property is your only property, you can sell it tax-free every eighteen months.

The rates depend on various factors, such as whether the individual is: over age 60, a 10% shareholder or more, different rental income tax tracks, etc. 

Tax Planning

The Israel Tax Authority has recently published the following which is a summary of tax breaks available for new immigrants and returning residents. The information can be found here.

As mentioned previously the main benefits for new immigrants and returning residents who became citizens since January 1st 2007 and onwards are as follows:

10 year exemption from tax paying on foreign-source income (i.e., income derived outside of Israel).

10 year exemption from declaring on foreign-source income which are exempted.

Foreign companies held and owned by “Olim” and Senior Returning Residents: A company established abroad and owned by an “Oleh” or a “Senior Returning Resident”, will not be considered as an Israeli company for taxation purposes for a period of 10 years, and thus will be exempt from taxes in Israel during this period on foreign-source income (i.e. income derived outside of Israel).

A one year period of adjustment from the date of arrival in Israel is granted upon request, which enables the individual to choose not to be considered as an Israeli resident for tax purposes during this one year period. The request for the adjustment year must be submitted within 90 days from the date of arrival in Israel.

5 years of entitlement to tax credit, with options for extension.

Who is entitled to the tax benefits?

Oleh” – New immigrant.

“Senior Returning Resident” – Individuals who returned to Israel after they lived continuously outside of Israel, and returned to Israel not sooner than 10 years after having ceased to be a resident of Israel. Those individuals will be considered an “Oleh”.

One-time measure – Individuals who returned to Israel during the years 2007–2009 are considered as “Senior Returning Resident” even if they lived continuously outside of Israel for at least 5 years (instead of 10 years).

Income entitled to tax benefits:

Passive income – 10 year exemption on dividends, interest, rent, royalties and pensions generated by assets held overseas.

Capital gain – 10 year exemption on capital gain from the alienation of assets located abroad. Extended to assets located abroad acquired after becoming Israeli resident. 

Business income – 10 year exemption on business income generated by assets held overseas.

Vocational and labor income – 10 year exemption on salaries and income from activities of independent nature, generated abroad. 

The above applies to businesses and occupations acquired or started before or after becoming an Israeli resident.

As mentioned earlier, FATCA legislation has impacted on reporting requirements for financial institutions around the world that have American clients. Americans also are required to file a Foreign Bank Account Report (FBAR) if the aggregate of their accounts abroad had more than $10,000 at any time over the calendar year or if the individual has a financial interest in a foreign account with that amount of money. An additional disclosure form (form 8938) may be necessary if you have higher asset levels in your foreign accounts.

Non-resident Americans abroad need to continue to file US tax returns under most circumstances and non-tax-compliant Americans abroad may need to consider entering the Offshore Voluntary Disclosure Program (OVDI). If this situation applies to you, see your accountant or tax lawyer immediately.

The Israel Tax Authority (ITA) has also released a new Voluntary Disclosure Program for Israelis who have unreported income abroad since 2003 when Israel switched to a worldwide income reporting system. There are anonymous and fast track options which are available temporarily to ease the disclosure guidelines.

Indirect taxes

Indirect taxes in Israel are considered to be regressive, as their impact is felt more by the poorer segments of society than the upper echelons. The most significant indirect tax in Israel is value added tax, or ma’am, which is currently 17%. Many other types of indirect taxes will affect your daily life in Israel, including fuel excise tax and a variety of customs and import duties.

Eilat continues to enjoy being a vat-free zone to encourage tourism.

Your Taxes "To Do" List

Use this chapter as a basic overview and guide. Consult a professional regarding your specific situation.

If you are American, be aware that you will be required to continue filing American tax returns unless you renounce your citizenship.

If you are a non-American, make sure you have a tax plan before you become a nonresident of your home country.

Ensure that income derived in your home country is not subject to double taxation.

Become aware of your obligations and benefits as an Israeli tax resident.

Familiarize yourself with the Israeli tax system.

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