תושב ישראל לראשונה גרסא אנגלית

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תושב ישראל לראשונה גרסא אנגלית

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תושב ישראל לראשונה גרסא אנגלית

  1. 1. Taxation “ First Time Israeli Resident”
  2. 2. General <ul><li>“ An individual who has become a resident of Israel for the first time” as of the 01.01.07, in accordance with the instructions of the Income Tax Order, will be entitled to income tax benefits for 10 years from the day they arrived in Israel ( “Benefit Period”). </li></ul><ul><li>An individual who become a resident of Israel for the first time is entitled to an exemption on their “yield income” which were produced outside of Israel during the Benefit Period as well as being entitled to an exemption on the capital gain accrued up until the end of the benefit period, on capital assets they had outside of Israel, whether they were purchased while the individual was a foreign resident or they were purchased after the individual became an Israeli resident for the first time. </li></ul>
  3. 3. Residency for Taxation Purposes in Israel <ul><ul><li>The substantive and deciding test for exploring an individual’s residency for the purposes of income tax is the Life Centre Test . An individual will be considered an Israeli resident in the event that the centre of their life is located in Israel. </li></ul></ul><ul><ul><li>In addition, there are alternative quantitative technical presumptions, which can be contradicted, according to which an individual’s centre of life will be considered Israel in the event that they stay a minimum number of days in Israel ( “Days Presumption”) during a certain tax year (spending over 183 days during a tax year or spending during a tax year over 30 days and the total of all their period of stay in Israel during the tax year and the two years, which preceded it, exceeded 425 days). </li></ul></ul>
  4. 4. Residency for Taxation Purposes in Israel <ul><ul><li>It should be stressed that the central and deciding test is the substantive life centre test and not the quantitative-technical test of the days’ presumption. Therefore one must make sure that the signs that his life centre is in Israel are strong and this despite staying in Israel in accordance with the said periods. </li></ul></ul><ul><ul><li>The status of a “New Oleh”, which is granted on behalf of the State of Israel, has no decisive position with regards to determining residency in Israel for taxation purposes. The Income Tax Order has no definition of “New Oleh” for the purposes of receiving tax benefits but rather the term “ an individual who has become a resident of Israel for the first time ” is used. </li></ul></ul>
  5. 5. Residency for Taxation Purposes in Israel <ul><ul><li>That is to say, even if an individual immigrates to Israel and is granted the status of “New Oleh” including receipt of an ID card and a passport, they will not be considered an Israeli resident for taxation purposes, unless their life centre is in Israel. </li></ul></ul><ul><ul><li>So that, life centre, is not determined by a single action and therefore it is difficult to ascribe it to a specific day. Ascribing life centre in Israel to a certain day, is dependent on the totality of actions which have created a new life centre (in Israel), and it can &quot;fall&quot; on any day. Therefore, determination when exactly (specific date) the New Oleh became a resident of Israel for the first time, is dependent to a great extent on the actions taken by the Oleh during that period which relate to different aspects which indicate a new life centre in Israel. </li></ul></ul>
  6. 6. Residency - Regards to the Convention to Prevent Duplication of Taxes <ul><ul><ul><li>Part of The Conventions is based on the OECD model – the Convention, as a rule, gives exclusivity or preference in taxation to the person’s country of residency. It should be stressed that each and every type of tax has to be tested against the Convention. </li></ul></ul></ul><ul><ul><ul><li>In accordance with the Convention, residency is determined first and foremost in accordance with the laws of the countries engaged. So that, in a situation whereby a taxpayer is resident in one of the engaged countries but has no income in the other engaged country, there is no relevance to the Convention in as far as it relates to prevention of duplication of taxes. </li></ul></ul></ul><ul><ul><ul><li>In a situation where an individual immigrates to Israel and determines their life centre there, they will be considered an Israeli resident and of necessity will also be considered an individual who has become a resident of Israel for the first time. Therefore, in such case the instructions of the Convention will apply in the event that the individual who has become a resident of Israel for the first time has income. </li></ul></ul></ul>
  7. 7. Residency - Regards to the Convention to Prevent Duplication of Taxes <ul><ul><ul><li>Apart from the purpose, which is expressed in the Convention and is the prevention of duplication of taxation, the Convention includes a clause, the Exchange of Information Clause . This clause is not dependent on residency, in contrast to the prevention of taxation duplication. </li></ul></ul></ul><ul><ul><ul><li>The exchange of information clause enables engaged countries to exchange between them information which is not necessarily related solely to the operation of the Convention, but also for the benefit of execution of the internal laws of the engaged countries. </li></ul></ul></ul>
  8. 8. “ Oleh” <ul><ul><li>A Jew born outside of Israel who has expressed their wish to settle in the State of Israel is entitled, in accordance with the Law of Return, to immigrate to Israel. In accordance with the Citizenship Act, the Oleh is entitled to Israeli citizenship. </li></ul></ul><ul><ul><li>In accordance with the Passports Act, a passport will be issued to an Israeli citizen in accordance with their request. The passport’s validity is – 10 years. </li></ul></ul><ul><ul><li>The authority to issue a passport is given in accordance with the Passports Act to the Minister of the Interior. The Minister of the Interior has the authority to issue a passport for a period of less than – 10 years or just a laissez-passer for an Israeli citizen who has not settled in the State of Israel . </li></ul></ul>
  9. 9. “ Oleh” <ul><ul><li>In accordance with the customary practice of the Census Administration Bureau answering to the Ministry of the Interior, immigrants applying for a passport are treated as follows: </li></ul></ul><ul><ul><ul><li>In the first year of immigration the Oleh usually receives a laissez-passer and not an Israeli passport and this at the end of 3 months from the day they immigrated. </li></ul></ul></ul><ul><ul><ul><li>At the end of the first year the Oleh’s request for a passport is considered. If the clerks are satisfied that the Oleh intends to settle in Israel they will usually be issued with a passport valid for a short period of a year. </li></ul></ul></ul><ul><ul><ul><li>After 3-5 years the possibility of issuing the Oleh with a passport valid for 5 years will be considered (similar to veteran Israeli citizen). The criteria for issuing the passport is also the Oleh’s settling in Israel. </li></ul></ul></ul>
  10. 10. “ Oleh” <ul><ul><li>The customary practice of the Census Administration Bureau, as shown above, is general. The Minister of the Interior has broad authorities in accordance with the Passports Act and so each case will be examined on its own merits. </li></ul></ul><ul><ul><li>So that, on the one hand there may be cases in which the Minister of the Interior makes the criteria for the granting of a passport tougher, and on the other hand there may be cases where the criteria are more liberal. </li></ul></ul>
  11. 11. The Tax Status - Individual who has Become a Resident of Israel for the First Time <ul><li>Exemption on the Sale of Capital Assets Outside of Israel </li></ul><ul><ul><li>The tax benefit on capital gain in Israel, which was accrued to an individual who has become a resident of Israel for the first time, will apply on the sale of the capital assets they had outside of Israel, including real estate assets. It should be stressed that the benefit will also be given in cases where the asset is bought outside Israel after they become a resident of Israel for the first time . </li></ul></ul><ul><ul><li>In the event that the individual sells a capital asset that they had outside of Israel by the end of the benefit period they will be entitled to a full tax exemption in Israel on the capital gain which they earned. </li></ul></ul><ul><ul><li>In the event that they sell the aforementioned capital asset (that was purchased outside of Israel during the benefit period or before) after the end of the benefit period, the exemption on the capital gain will be reduced dependent on the time they held the capital asset after the end of the benefit period. </li></ul></ul>
  12. 12. The Tax Status - Individual who has Become a Resident of Israel for the First Time <ul><li>Cash </li></ul><ul><ul><li>The State of Israel exempts, as detailed herein : </li></ul></ul><ul><ul><ul><li>Exemption from Tax on Interest from Monies Invested in Deposits Outside Israel It is possible to invest monies in bank deposits outside Israel. The interest on these deposits will be exempt from tax in Israel during the benefit period. </li></ul></ul></ul><ul><ul><ul><li>Exemption from Tax on Interest from Monies Invested in Foreign Currency Deposits in Israel .An individual who has become a resident of Israel for the first time can in addition also enjoy, an exemption from interest accrued to them in foreign currency bank deposits in Israel for 20 years from the day they became an individual who has become a resident of Israel for the first time. The main condition to getting an exemption is that the income from the interest be a passive income.In addition, there are a number of procedural conditions which must be taken into account before investing the monies as stated in a deposit. </li></ul></ul></ul>
  13. 13. The Tax Status - Individual who has Become a Resident of Israel for the First Time <ul><li>Cash </li></ul><ul><ul><ul><li>It should be noted, that so long as an Oleh, is not considered for taxation purposes an Israeli resident, then with regards to their cash investments, the instructions of the Order which apply to foreign residents investing cash in Israel will apply to them, since the individual's residency for this purpose has not changed. </li></ul></ul></ul>
  14. 14. The Tax Status - Individual who has Become a Resident of Israel for the First Time <ul><li>An Exemption from Tax on the Proceeds of Selling a Residence </li></ul><ul><ul><li>An Israeli resident, an individual who has become a resident of Israel for the first time or a foreign resident are entitled to an exemption from tax on betterment that will be accrued from the sale of a residence in Israel, and this independent of the status of an individual who has become a resident of Israel for the first time, and all under the terms and conditions stated in the Act. </li></ul></ul><ul><ul><li>In general, there are two substantive exemption instructions, one of which determines that, under certain circumstances, a person selling a privately owned residential property will be exempt from land betterment tax. The second exemption instruction relates to the sale of a single residential property if additional conditions are fulfilled. </li></ul></ul>
  15. 15. The Tax Status - Individual who has Become a Resident of Israel for the First Time <ul><li>Salary in Israel </li></ul><ul><ul><li>On salary for work carried out in Israel income tax in Israel will be imposed. The rate of marginal tax as of the 2010 tax year will stand at 45% and will decrease gradually to a rate of 39% in the 2016 tax year. </li></ul></ul>
  16. 16. The Tax Status - Individual who has Become a Resident of Israel for the First Time <ul><li>Adjustment Year for Taxation Purposes </li></ul><ul><ul><li>An individual who has become a resident of Israel for the first time can be considered for taxation purposes, during the first year from when they arrived in Israel (“Adjustment Year”), a foreign resident and their status for taxation purposes will be that of a foreign resident, for all intents and purposes, as long as they have notified within 90 days of arriving in Israel of their wish to enjoy an adjustment year. </li></ul></ul>
  17. 17. The Tax Status - Individual who has Become a Resident of Israel for the First Time <ul><li>Exempt Incomes for Foreign Residents </li></ul><ul><ul><li>A foreign resident, who was exempt from tax on interest and capital gains from securities, will become liable for tax in Israel for these incomes only after they become a resident of Israel; as can be seen from a verbatim interpretation of the Income Tax Order. It is our view that, the State of Israel must consider taking this further and applying the exemptions on assets and monies that the individual had in Israel during the period they were a foreign resident. The position as stated has as yet to be tested in the Courts in Israel and the Israeli tax authorities have yet to express their stand on the matter. </li></ul></ul><ul><ul><li>It should be noted, and in accordance with the said, that as long as an Oleh, is not considered for the purposes of the Income Tax Order, an Israeli resident, then on the profits from the sale of capital assets, including securities, the instructions of the Order applying to foreign residents selling capital assets will apply, since that individual's residency for this purpose has not changed.. </li></ul></ul>
  18. 18. The Tax Status - Individual who has Become a Resident of Israel for the First Time <ul><li>Tax Credits for the Oleh </li></ul><ul><li>In calculating the immigrants' tax, the following credit points will be taken into account: a quarter of a credit point for each month for their first eighteen months after immigration to Israel, a sixth of a credit point for each month of the twelve months thereafter and one twelfth for each month of the twelve months after that. And in total, the Oleh will enjoy during a continuous period of 42 months 7.5 credit points, each credit point has a value of just over 2,000NIS. </li></ul>
  19. 19. The Tax Status - Individual who has Become a Resident of Israel for the First Time <ul><li>Duty of Reporting </li></ul><ul><ul><li>An individual who has become a resident of Israel for the first time is entitled to an exemption, as long as they are interested in such, from the duty of reporting to the tax authorities in Israel regarding income produced or accrued outside of Israel or originating from assets outside of Israel, during the benefit period. </li></ul></ul><ul><ul><li>An individual, who has become a resident of Israel for the first time, is entitled to an exemption, as long as they are interested in such, from submitting a statement of capital to the tax authorities in Israel on their capital and assets located outside of Israel during the whole of the benefit period. </li></ul></ul>
  20. 20. The Tax Status - Individual who has Become a Resident of Israel for the First Time <ul><li>Duty of Reporting </li></ul><ul><ul><li>It should be noted that, so long as an Oleh does not change their residency to an Israeli residency and does not become a resident of Israel for the first time, they will be considered for taxation purposes a foreign resident. In this matter, the instructions of the Order determine that a duty of reporting will apply to any individual, who is a foreign resident, who had an income which is liable for tax during the tax year. </li></ul></ul><ul><ul><li>With regards to that individual, the Income Tax Order also determines that, an assessing officer is entitled to demand from them that they submit a report even if they are not obliged to submit a report as stated above – it is reasonable to assume that such a demand will only be made, if the foreign resident produces income in Israel. </li></ul></ul>
  21. 21. A “New Oleh’s” Eligibility for Tax Benefits and Exemption from Reporting <ul><ul><li>The term “an individual who has become a resident of Israel for the first time” is not defined in the Income Tax Order. In any case, the combination of the words “a resident of Israel” in this term is a significant combination of words defined in the Income Tax Order, as stated above, and determined in accordance with the life centre test. </li></ul></ul><ul><ul><li>As explained above, the status of a “New Oleh”, which is granted on behalf of the State of Israel does not determine that the New Oleh is a resident of Israel for taxation purposes. </li></ul></ul><ul><ul><li>We conclude that, if an individual immigrates to Israel and is considered a “New Oleh” but is not considered a resident of Israel for taxation purposes since their life centre is not located in Israel, the individual will not be entitled to the benefits detailed in above including the exemptions in the matter of reporting. </li></ul></ul><ul><ul><li>In addition, a “New Oleh” who is not considered a resident of Israel for taxation purposes will continue to be a foreign resident for taxation purposes and therefore their taxation status in Israel will not be different from their status in the period before receiving the status of a New Oleh. </li></ul></ul>
  22. 22. Trusts <ul><ul><li>The use of trusts in the way the English law regulates them as well as the use of a trust corporation recognised in the continental law is not valid in Israel. </li></ul></ul><ul><ul><li>The reason for this is the legal situation in Israel where an individual cannot impose their wishes on how their assets are distributed after their death other then through a will. </li></ul></ul>
  23. 23. Trusts <ul><ul><li>In accordance with the ruling existing in Israel, a trust cannot be a legal entity but rather a set of relations between the creator, the trustee and the beneficiary. A trust in Israeli law is defined as: “A trust is a connection to an asset according to which a trustee must hold or act in it on behalf of the beneficiary or for another purpose”. </li></ul></ul>
  24. 24. Trusts <ul><ul><li>So long as an asset is not imparted to a beneficiary and so long as the trust is managed for the beneficiary, then ownership in the asset belongs to the trust creator who has not parted from the asset. </li></ul></ul><ul><ul><li>So that, the Israeli law does not allow for the trust creator to be separated from their assets on behalf of the trustee so that they can manage them on behalf of the beneficiary. </li></ul></ul><ul><ul><li>In fact, so long as the assets or monies are not imparted to the beneficiary the creator continues to be considered the owner of the assets or monies. Even if the assets or monies are imparted to the beneficiary but are they are held and managed by the trustee, the trustee is not considered to be the owner, but rather it is the beneficiary for whom they are managed. </li></ul></ul>
  25. 25. Trusts <ul><ul><li>Usually a trustee is used in Israeli law as a neutral factor in transactions, who transfers assets or monies to one of the parties to the transaction after fulfilment of the terms which are the basis of the transaction. Another use of a trust is to create a buffer between the owner of an asset or monies and the various creditors trying to get to the owner’s assets or monies. </li></ul></ul><ul><ul><li>It should be stressed that, with regards to monies held in banking corporation trusts in Israel, then in accordance with the money laundering laws existing in the State of Israel the trustee is obliged to report to the banking corporations in which the monies are held in trust who the beneficiary is, and in a company chain the individual beneficiary located at the end of the chain. Of course the authorities in Israel have access to the data indicating the end beneficiary of trust monies. </li></ul></ul>
  26. 26. Trusts <ul><ul><li>In accordance with the money laundering laws of Israel, there are reporting duties and other duties imposed on financial service providers. Some of the said duties are objective – such as, actions on deposits or withdrawals from an account in an amount equal to at least 50,000NIS, and others are subjective – such as, reports of the service recipient, which in light of the information in the possession of the banking corporation, are seen by them as irregular (activity the purpose of which is circumventing the duty of reporting, activity related to the closing of accounts, activity which is seen as lacking financial or business logic, activity of a substantial scope, activity through a power of attorney, unusual scope of actions and so forth). </li></ul></ul>
  27. 27. Trusts <ul><ul><li>So that, any asset or cash which the creator transfers to the trustee will be considered the property of the creator or the beneficiary while the trustee will be obligated, in the event they are required to according to a request from an authorised authority including due to a request for an exchange of information by virtue of the Conventions, to give full disclosure of the source of the monies or assets. </li></ul></ul>
  28. 28. Taxation of a Foreign Resident Created Trust <ul><ul><li>A foreign resident is entitled to create a trust in Israel. In the event that all the trust creators and beneficiaries are foreign residents the trust will be considered for taxation purposes a “foreign resident created trust” . A trustee in a foreign resident created trust can be a resident of Israel or a foreign resident. </li></ul></ul><ul><ul><li>The Income Tax Order refers to a foreign resident created trust as a foreign resident for all intents and purposes. And therefore, on the trust income and profits produced outside of Israel there is no duty of reporting and accordingly there is also no tax imposed. On income or profit, which accrued or were produced in Israel there is a duty of reporting and duty of payment of tax and this in accordance with the case by case circumstances. The duty of reporting and paying tax is imposed on the trustee. </li></ul></ul>
  29. 29. Taxation of a Foreign Resident Created Trust <ul><ul><li>It is likely, that foreign residents who are exempt from tax in Israel on interest from deposits and capital gains from the sale of securities will also enjoy the exemption even if they have set-up a foreign resident created trust. </li></ul></ul><ul><ul><li>However, in order to generate certainty in the matter and because of the fact that the trust legislation is new and has yet to be actually implemented, and the tax authorities have yet to express their position with regards to the legislation and as yet there have been no rulings in the matter, it is recommended to apply for a tax resolution that permits the granting of the exemption, before a trust of this sort is established. </li></ul></ul>
  30. 30. Taxation of a Foreign Resident Created Trust <ul><ul><li>The duty of the trustee – in accordance with the Income Tax Order, a trustee of a foreign resident, whether they are an Israeli citizen or not, will be assessable and liable in their name, whether they receive income or not, and all in the manner and the amount that that person was assessed or liable for if they were an Israeli resident and that income was due to them. </li></ul></ul><ul><ul><li>Whoever is assessable and liable as stated above, will be responsible for everything the carrying out of which is necessary for execution of the instructions of the Income Tax Order in order to assess the income of the person on whose behalf they are acting and in order to pay the tax imposed on them. Therefore, the instructions of all laws in the matter of tax payment, reporting, collecting and penalties will apply to the trustee for the trustee's income and for the trustee's assets. </li></ul></ul>
  31. 31. Taxation of a Foreign Resident Created Trust <ul><ul><li>The instructions relating to trusts are complex and refer to the trustee, the creator and the beneficiaries, both with regards to the duties imposed on them by virtue of the Income Tax Order and the duties imposed on them by virtue of the money laundering laws of Israel and in the world. </li></ul></ul><ul><ul><li>Because of their complexity, their implications are not part of this review. We recommend broadening the checks on this issue as part of the array of considerations relating to immigrating to Israel and change of residency, since trustees in Israel, will take all the actions necessary, according to law, to ensure the duties imposed on them, including those relating to reporting and payment of taxes. </li></ul></ul>
  32. 32. Founding a Company <ul><ul><li>As a rule, in the event that an individual who has become a resident of Israel for the first time (in this clause: the “individual’) wishes to act through a company, then our recommendation is to establish a company outside of Israel even before becoming a resident of Israel for the first time . In addition, the individual must be the controlling and managing factor in the company. </li></ul></ul><ul><ul><li>The manner of incorporation, control and management, as stated define a company as being a foreign resident (which is not an Israeli resident), for the period of the benefit. </li></ul></ul><ul><ul><li>From its very nature a foreign resident company is not liable for tax in Israel for income which it produced outside of Israel . On the other hand, a foreign resident company producing income in Israel is liable for tax in Israel and has a duty to report to the tax authorities in Israel regarding this income, since this company has a direct connection to Israel since it produces income in Israel. </li></ul></ul>
  33. 33. Founding a Company <ul><ul><li>It should be clarified, that the mere fact that an individual founds a company outside of Israel which they control and manage from Israel and which is considered a foreign resident company will not prevent its liability in Israel for tax if the company produces income in Israel . </li></ul></ul><ul><ul><li>The company’s income will be considered as produced in Israel in the event that they maintain income yielding business activity in Israel (hereinafter: the “Business Activity”). </li></ul></ul><ul><ul><li>Therefore, it is important to check whether the company’s business activity is carried out in Israel. Hence for example, it is important to make sure that meetings, contract signings, provision of consultation services, negotiation activity, collection of commissions, and so forth, take place outside Israel </li></ul></ul>
  34. 34. Founding a Company <ul><ul><li>Tax Benefits - the Individual Acts through a Company </li></ul></ul><ul><ul><li>The company’s income will not be liable for tax in Israel during the benefit period, and this so long as the income is produced outside of Israel and so long as it is managed and controlled by the individual. It should be stressed, that in the event that the individual continues to control and manage the company after the end of the benefit period, the company will become an Israeli resident company from that date and will therefore be liable for tax in Israel on its income. </li></ul></ul><ul><ul><li>Dividends that are distributed to the individual from the company’s profits will not be liable for tax in Israel during the benefit period. </li></ul></ul>
  35. 35. Founding a Company <ul><ul><li>Any work income paid by the company to the individual, for work executed outside of Israel by the individual, will be exempt during the benefit period. It should be stressed, that all the work income paid to you by the company, for work carried out in Israel , will be liable for tax according to the marginal tax on work income (see clause 5.4 above). Receipt of a salary from the company, can affect the decision of the tax authorities, in deciding the question whether the control and management of the company during the benefit period, is outside of Israel (clause 6.4.1 above). </li></ul></ul><ul><ul><li>During the benefit period, the company will not be obliged to report to the tax authorities in Israel for income which they produced outside of Israel. </li></ul></ul>
  36. 36. Founding a Company <ul><ul><li>In summary, in the event that the company incorporates outside of Israel and the control and management of it is carried out by the individual, the company will be considered a foreign residency company during the benefit period. </li></ul></ul><ul><ul><li>So, in the event that its business activity is not carried out from Israel and it doesn’t produce income in Israel it will not be liable for tax in Israel and the duty of reporting its income to the tax authorities in Israel will not be imposed on the company. </li></ul></ul><ul><ul><li>It should be noted that, only in the event that the individual is employed by the company in Israel and receives a salary for the work carried out for the company in Israel, then the company will be obligated in reporting the salary they paid to the individual and the amount of tax deducted from the salary and will be obligated to pass on to the tax authorities the amount of tax deducted, independent of the duty to report which applies to the company with regards to its income. </li></ul></ul>
  37. 37. Founding a Company <ul><ul><li>In our view, since a company is considered a foreign residency company during the benefit period, then it will be considered an asset the individual had outside of Israel and in the event that the individual sells the company’s shares before the end of the benefit period the capital gain will be exempt from tax in Israel. </li></ul></ul><ul><ul><li>This aspect has yet to be tested by the tax authorities and they have yet to give their opinion on the issue. </li></ul></ul>
  38. 38. <ul><li>Thank you </li></ul>End

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