Following are some questions answered in a recent aliya call-in. The information below is a brief general summary. In specific cases, always consult tax and legal advisers in each country.
Who is a resident for Israeli tax purposes?
Individuals will be resident if their center of living is in Israel, having regard to their overall personal, family economic and social circumstances. Individuals will generally be presumed resident if they are present in Israel 183 days or more in a tax year, or 30 days in a tax year and 425 days in Israel in a particular year plus the previous two years. A day includes a part of a day. These presumptions may be challenged by the taxpayer or the tax authorities.
Aside from the number of days, other center of living criteria listed in the law are:
* Location of permanent home
* Place of residence of the individual and his/her family
* Place where the individual regularly works or is employed
* Location of active and material economic interests
* Place where the individual is active in various organizations, associations or institutions
* Employment by official bodies
Do citizenship or domicile or immigration status matter?
Generally not for Israeli tax purposes. They matter for other purposes, of course.
When do I start being a resident?
According to accepted practice and the recent Arie Gonen case in the Israeli Supreme Court, an individual becomes resident in Israel upon his date of arrival in Israel - in that case in October of the tax year concerned. But this does not happen overnight - it happens at the end of a gradual process of setting up residence in Israel. Israel's tax treaties contain "tie breaker" rules for resolving dual residency problems.
What are the consequences of becoming an Israeli resident for tax purposes?
Once you become an Israeli resident, the following Israeli tax implications may be relevant:
* Israeli tax on your worldwide income and gains at rates of 20%-48%, plus National Insurance (social security) contributions in certain cases.
* However, you may benefit from exemptions for income from pre-arrival overseas assets - five years for dividends, interest, rent, royalties and pensions and 10 years for capital gains. Note these exemptions do not apply to assets acquired after you become an Israeli resident. Similar exemptions are also available to returning Israeli residents who acquired overseas assets while residing abroad for a continuous period of three years.
* New residents also enjoy a 20-year exemption for interest received on a foreign currency deposit of at least three months with an Israeli bank, if various procedures are followed. A 5-year exemption applies to returning residents who lived outside Israel more than three years.
* If you later stop residing in Israel, you may have to pay a departure tax on your assets. This is really a capital gains tax at rates ranging from 20%-48% on your assets, unless you fall within the 10-year capital gains tax exemption for new Israeli residents.
My wife and I are returning to Israel after living 20 years in North America. We are US and Canadian citizens. What are the key issues we should check out?
Many matters come to mind to check out with advisers in each country. These include:
* Canadian departure tax (really capital gains tax) when you leave Canada - it can sometimes be postponed.
* Israeli tax exemptions for returning residents after living abroad over three years. The benefits relate to pre-arrival overseas assets (not post arrival assets) - five years for dividends, interest, rent, royalties and pensions; and 10 years for capital gains.
* US citizens must continue reporting annually to the IRS.
* Coordinate your foreign tax credits to avoid double or triple taxation.
My parents will continue to live outside Israel and want leave me some assets in their will - what are the implications?
Israel does not have an estate or inheritance tax. Nevertheless, there may be double taxation - estate or inheritance tax abroad and capital gains tax in Israel when selling the assets. It may be prudent for your parents NOT to leave you assets that have appreciated in value - instead they might consider leaving you cash or else leave assets in trust for your benefit (provided you will have no control or influence over the conduct of the trust). Other rules and considerations also apply. Professional advice is needed in each country.
After aliya, I will be receiving a distribution from a trust fund established with assets outside Israel by my parents who have always lived outside Israel. Do I have to report the distribution to the Israeli tax authority?
Yes, you must report receipt of the distribution, but you may be exempt from Israeli tax if certain conditions are met and you do not control or influence the conduct of the trust. Check the situation with experienced advisers in each country.
After aliya, my wife will be receiving rental income from a partnership owning a mall and other real estate in North America. How will Israel tax this?
Rental income from abroad may be exempt from Israeli tax during your first five years residence in Israel provided it is passive rental income, i.e. you do not work for, nor manage, the mall operation. After five years, you may choose between Israeli tax of 15% on the gross rental income less depreciation according to Israeli tax legislation, or Israeli tax at regular rates - up to 48% at present - less a deduction for all expenses and depreciation and a credit for foreign federal and state/provincial taxes (not city taxes). If you do work for or manage the mall, you and the other investors (partners) may be potentially taxable in Israel. Each should consult tax and legal advisers in each country including the availability of double-tax relief. Also check the liability to national insurance (social security) in each country.
My wife and I have five children. We calculate that after our aliya, I must earn at least NIS 18,000 and my wife must earn at least NIS 8,000 net of tax and national insurance (social security) for us to live. We are having a lot of trouble finding out how much our gross income should be.
The calculations are complex. According to special software we used and various assumptions we made, it seems that in the first six months of Israeli residency, your gross income will need to be approximately NIS 28,500 and your wife's gross income will need to be about NIS 8,700.
I presently have an unincorporated consulting business which I want to continue operating after my aliya - are there any tax breaks for me?
If you operated the business outside Israel for five years before your aliya, you may enjoy a four-year exemption from Israeli tax after you arrive. However, it appears the exemption is only intended for income earned outside Israel so you may still be taxable in the overseas country(ies) concerned. Also, this exemption does not apply if the business was conducted though a company (such as an LLC or S Corporation in the US). Other income will be subject to Israeli income tax at rates ranging up to 48% plus national insurance (approximately 12%-16%) on the first NIS 35,760 per month and you will need to check the VAT situation (15.5% on transactions in Israel, zero rate for certain export transactions).
How will my non-Israeli pension plan be taxed after my aliya?
Any pension payments will be exempt in Israel in your first five years of Israeli residency (if you receive anything then). Thereafter, your Israeli tax will not exceed the tax you would have paid in the country where the pension is paid if you had stayed a resident there. It is unclear what happens if your pension is paid from a third country where you didn't live. Also, check the provisions of any tax treaty between Israel and the country where the pension is paid - for example, under the Israel-UK treaty, the UK will tax you in the first five years if Israel doesn't.
How will income from my US IRA or Canadian RRSP retirement plan be taxed?
The Israeli Tax Authority claims that if you can vary the payout, it is a mutual fund not a pension plan. If so, the income element of the payout (not capital) is generally exempt in your first five years of Israeli residency, then taxed at a rate of 20%. Any US tax on the payout should be creditable against the 20% tax in Israel. Canada generally withholds 15% tax under the Canada-Israel tax treaty - this should be creditable against the 20% tax in Israel,
What about a Roth IRA where US citizens are exempt upon a payout as they claim no deduction when they paid money in?
The income element of the payout is generally exempt in your first five years of Israeli residency, Thereafter, there it will be taxed at a rate of 20% in Israel notwithstanding the exemption in the US.
I understand I can enjoy a reduced 0.5% of "acquisition tax" (up to a prescribed limit) if I buy a home in Israel within one year before my aliya and seven years after. This is a big saving on the usual rates which range up to 5%. But if I buy before I arrive, how does the Israeli Tax Authority know I will actually arrive on aliya within a year?
This has to be negotiated individually with the Israeli Tax Authority - they may want refundable tax upfront or they may, perhaps, agree to another procedure - there is no fixed rule.
I am employed by a corporation in the US and my boss says I can continue working the same way after my aliya. What is the Israeli tax side?
If you remain employed by the US corporation, it must withhold Israeli income tax and national insurance (social security) from your salary. Also, the US corporation will likely be doing business in Israel because of your activity ("permanent establishment") and have to pay Israeli taxes (income tax, VAT etc) on such activity. The Israeli income tax is creditable against US federal (not state) taxes of the US corporation but can be a bureaucratic burden. Alternatively, all concerned should consider utilizing an Israeli company for Israeli activity owned by your boss or you, among other possibilities. Specialist advice should be obtained in each country.
I want to continue managing my wholly owned non-Israeli corporation after I become an Israeli resident - are there any issues with this?
Yes, if the corporation's business is "controlled and managed" by you once you become an Israeli resident, the corporation will also be deemed to be resident and fully taxable in Israel. This can lead to double taxation and most tax treaties offer little help in this regard. Consider leaving the management to others and obtain professional advice in each country.
The writer is an International Tax Partner at Ernst & Young Israel.