Israeli Taxation | נמרוד ירון ושות׳

Prize-Winning activity

Adam Zur — Mon, 11 Mar 2024 07:09:54 +0000

What to Know About Taxes on Prize Winnings

In this article, we will examine the tax implications of winning a prize, including taxes on game show winnings, taxes on professional awards, taxes on personal awards, taxes on lottery winnings, taxes on reality competition show winnings (Big Brother, MasterChef, Survivor), taxes on sports betting (Toto), and taxes on various types of raffles. The taxation of prizes and lotteries is a controversial issue in Israeli tax law. Until mid-2003, based on the source theory, winnings from gambling, prizes, and lotteries were considered ‘gifts from heaven’ and were exempt from taxes in Israel. As part of the economic policy to expand the tax base in Israel, Amendment 134 was added to the ordinance. From Amendment 134 to the Income Tax Ordinance [effective 1.7.2003], Section 2A was introduced, stating: “Income or profit… whose source is from gambling, lotteries, or prize-winning activities.” The wording of this section indicates that it applies only to income originating from one of the methods mentioned in the section.

An important question arises: When is a prize considered income originating from a prize-bearing activity, and when does the source of the win come from another income source, such as a business, rather than a prize-bearing activity?

In other words, does the win depend on the personal circumstances of the winner, or is all that is required for the winner to join an existing event, thereby “purchasing” their chances of winning?

The answer to this question will determine the classification of the prize and will affect the taxation applied to it. The classification of the prize is very important and will be determined based on the factor that influences the win – the very factor that essentially grants the winner the right to the prize.

Prizes can be classified under three categories:

When the win results from a personal advantage of the winner, the received amount is typically classified as income from a business or professional activity. In the case where a prize is classified as a business receipt, the tax imposed will be according to the regular tax brackets (marginal tax rate).
If the receipt is due to a random win in a lottery, without the winner having a special influence on their winning, the received amount will be classified as a prize under Section 2A of the ordinance. In this case, the applicable tax rate will be 35%.
A prize received in personal context and/or a prize received from another source not covered under Section 2A mentioned above will not be considered taxable income, and therefore, no tax will be imposed on it. Most of the opinions we provide examine whether it is indeed possible to recognize the receipt as a prize received in a personal context.

Exemption from Tax on Winning a Prize or Lottery:

As of 2024, the exemption from tax on prizes is set at 33,840 ILS. Up to twice this amount, a reduced exemption will be provided according to the calculation established in the Income Tax Ordinance (Determining the Amount for Earnings or Profits from Gambling, Lotteries, or Prize-Bearing Activities), 2003. The mechanism is a “rolling exemption”; for instance, if I won a sum of 40,000 ILS, the winnings exceed the exemption limit by 6,160 ILS (40,000 – 33,840), thus the exemption would decrease by the surplus amount to 27,680 ILS (33,840 – 6,160). Consequently, I will pay 35% tax on a sum of 12,320 ILS, representing the difference between the winning amount and the “adjusted” exemption.

Receipts from Prize-Bearing Activities – Classifying the Source of Income for Tax Purposes:

As mentioned, the main conflict concerns the criteria underlying eligibility for a prize and the extent of the winner’s active involvement or lack thereof in the prize-bearing activity. This contrasts with receipts from business activities based on knowledge and skills, where such receipts would be classified as income from professional services or business income subject to tax under Section 2(1) of the ordinance, with tax imposed according to tax rates.

In this regard, the court’s stance is known (the verdict in the case of Baruch Meshulam vs. the Tax Officer TA 1). Among the criteria developed in jurisprudence for distinguishing between a neutral prize and a prize characterized as business activity are the competitor’s interest in participating in the activity as a means to promote their business and showcase their expertise, and the competitor’s business or research work for participation in the competition. The common denominator among these criteria is the personal advantage and the business interest of the participant in the competition and the absence of neutrality.

Accordingly, over the years, the Tax Authority has published implementation instructions and income tax circulars to clarify its position on these matters.

Income Tax Circular No. 21/90 “Scholarships, Grants, and Prizes as Income” adopts the court’s stance regarding Meshulam, stating that although prizes are considered gifts from heaven, the prize Meshulam won was based on his regular occupation.

Following this, the Tax Authority published Implementation Instruction 19/90 – “Prizes for Agents and Merchants as Income and the Duty of Withholding at Source.” Additionally, the Tax Authority also published Income Tax Circular No. 17/2004 – Taxation of Lotteries, Betting, and Prizes. This circular helped clarify the correct interpretation of Section 2A of the ordinance according to the Tax Authority’s stance. This circular explained the personal and territorial taxation principles of the section and clarified profits not seen as prizes. Accordingly, based on these circulars, if the winner has a personal advantage of skills, proficiency, knowledge, and expertise as a significant component required for winning the prize, the tendency is to see the prize as business income. If the winner does not require a personal advantage to win the prize, the tendency will be to see the prize as a receipt from a prize-bearing activity subject to Section 2A of the ordinance. When the prize is received as a “gift from heaven,” it will not be considered taxable income, and no tax will be imposed on it.

Misclassifying the prize could cost the winner 35% of the prize amount they receive – which they would need to pay as tax. This contrasts with classifications that result in lower tax rates or, in some cases, complete exemption from tax/partial exemption, and sometimes even determination as a receipt not subject to tax. Therefore, the classification of the prize is critical.

For example, winning a prize in a reality competition is subject to full taxation. The reason is that when a person enters a competition, they do so with the intention of winning a prize.

Our office specializes, among other things, in providing professional opinions on the taxation of prizes. You can read an article from Mako about tax on winnings – click here.

For the sake of demonstration – taxation of common prizes in Israel:

Minimum Taxation	Maximum Taxation Under Business Classification	Maximum Award Taxation Amount Under Award Classification	Amount	Category & Classification	Award Name
0	23,500 NIS	13,650 NIS	50,000 NIS	Literature	Bernstein Prize – Original hebrew novel
0	117,500 NIS	87,500 NIS	250,000 NIS	singing, cooking, baking and extreme sports	Reality competitions prize
0	470,000 NIS	350,000 NIS	1,000,000 NIS	Singing	Winning the Eurovision Song Contest
0	235,000 NIS	175,000 NIS	500,000 NIS	Sports	Olympic competitions abroad
0	84,600 NIS	63,000 NIS	180,000 NIS	Literature	Sapir Prize
0	35,250 NIS	26,250 NIS	75,000 NIS	Academic and scientific research	Israel Prize
0	23,500 NIS	₪13,650 NIS	50,000 NIS	Hebrew Literature	Levy Eshkol Prize
0	Academy, Science and Art	35,000$	$100,000	$47,000 [about 164,500 NIS according to the dollar exchange rate of 3.5]	Wolf Academy Prize

The main prizes in which there is a dispute regarding taxation are:

Israel Award; Wolf Foundation Award; Dan David Award; A.S.C (art, science, culture) Award; Israeli Sports Award; Lifetime Achievement Award; World Artistic Gymnastics Championship; Maccabiah; Grand Slam (Judo); Grand Slam (Tennis); Grand Prix; the World Judo Championship; the Basketball World Cup; the World Swimming Championship; the Women’s Basketball World Championship; the World Poker Championship; the World Acrobatics Championship; the European Swimming Championship; the European Chess Championship; the Chess World Cup; the Bialik Award; the Tzipora and Ze’ev Ben-Haim Hebrew Language Academy Award; Akum Award; Bhatt Award; Israel Museum of Illustration Prize for children’s book named after Ben-Yitzhak; Brenner Prize; Bernstein Prize; Bernstein Prize – Original Hebrew Novel; Leah Goldberg Prize; Geffen Prize; Tschernihovsky Prize; Yitzhak Sade Prize for military literature; The Jerusalem Prize; Leidesdorff Prize for the Arts; the Newman Prize for literature; the President’s Wife Prize for Hebrew Poetry; the Sapir Prize; the Agnon Prize for the Art of Prose; the Einat Prize; the Aminach Prize; the Akevyahu Prize for poetry; the Chechik Prize for national security studies; the “Haaretz” Short Story Contest; Ministry of Education and Culture Award; Yehuda Amichai Award; Creation Award for Hebrew Writers; Minister of Culture and Sports Awards in the field of Hebrew Literature Creation; Deborah Omer Award; Israel Award in the field of Hebrew Minstrel; Rechter Award; Young Artist Award; Encouraging Creativity Award for plastic Art; Lifetime Achievement Award in the field of The plastic arts; the film art Award; Award for creators and performers in the field of concert dance.

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New Immigrant – Tax Benefits

Adam Zur — Sun, 19 Nov 2023 13:12:25 +0000

Tax benefits and exemptions for new immigrants in Israel

The State of Israel encourages immigration (Aliyah) and grants a wide range of tax exemptions and benefits to new immigrants. The purpose of the benefits and incentives is to encourage immigration from countries with more favorable tax policies and also to ease the transition and integration in Israel. The generous tax benefits were expanded in Amendment 168 of the Income Tax Ordinance that the Tax Authority published on September 16, 2008. The purpose of expanding the tax benefits is to encourage Aliyah of quality human capital as well as investors with financial potential by creating certainty for immigrants and operational simplicity while facing the tax authorities.

New immigrant definition

An individual who has never been a resident of Israel in the past and became a resident of Israel for the first time.

What is not included in the tax exemption?

It is important to remember that work performed in Israel is not exempt from tax in any case. New immigrants who work within Israel are in most cases fully taxable. Tax liability will also apply if the work was performed for a company that is not a resident of Israel.

Our firm has dealt with many cases where new immigrants performed work from Israel and there was a risk of double taxation. It is advisable to consult and understand how it’s best to act, what to avoid and how to optimally utilize the benefits offered to new immigrants.

Summary of exemptions for new immigrants

Exemption for new immigrants	Duration of exemption
Business income from abroad	10 years
Passive income from abroad	10 years
Capital gains from abroad	10 years
Salary from abroad	10 years
General “bending” of control and management, Controlled Foreign Company and Foreign Professional Company, exemption from reporting	Exists
Are new activities included in the exemption?	Included in the exemption
Interest income on foreign currency deposit in the bank of Israel	20 years

Tax exemptions and benefits for new immigrants, including the expansions introduced in Amendment 168

Exemption from tax on all types of income – full exemption from taxation for a period of ten years on all assets and income originating outside of Israel, including: Passive income from rental fees, interest, dividends, royalties and pensions originating abroad, income originating from a business, profession and additional salaries from work (as long as the place of work is not in Israel).
Exemption from capital gains tax – exemption from capital gains tax on the sale of assets abroad during the ten-year period from the day a person became a resident of Israel.

* If the asset is sold after the end of the period, the profit accrued up to the end of the ten-year period will be exempt and capital gains tax liability will apply only to the profit accrued from the expiration of that date.

* The exemption also applies to assets purchased after the date of immigration and sold during the exemption period.

* The exemption also applies to assets received through inheritance by a new immigrant, even after the date of his immigration to Israel.

Exemption from income tax on income abroad of a company owned by a new immigrant (a distinction must be made between a company owned by a new immigrant and management by him, since any work or activity performed from Israel will be taxable in Israel).
New immigrants are fully exempt from the obligation to report exempt income during the exemption period.
Tax relief on pension even after the exemption period – The amount of tax on a pension originating outside of Israel, due to work in a foreign country, will not exceed the amount of tax that would have been paid on that pension in the country where the pension is paid, if he remained a resident of that country.
Tax benefits on interest income from a foreign currency deposit – Interest income on a foreign currency deposit in a Bank in Israel will be exempt from tax for new immigrants for twenty years from the date of their immigration to Israel, provided that the source of the funds deposited in the deposit belonged to the new immigrant before he became a resident of Israel.

Year of acclimatization for new immigrants and returning residents

Section 14(b) of the Income Tax Ordinance establishes the mechanism of the “year of acclimatization” which allows the new immigrant to continue to be considered a foreign resident for one year from the date of immigration to the country. The mechanism is intended to encourage those who are hesitant and afraid of the irreversible implications of the decision to immigrate to Israel, and in fact allows a “trial year” in which one will be considered a foreign resident and after which he can decide whether to immigrate to Israel or return to the country of residence. The operation of the mechanism depends on the individual’s choice. If the individual chooses not to use this mechanism, his tax status will be determined according to the Ordinance. If the individual chose to activate this section and subsequently decided to settle in the country as a resident of Israel for tax purposes, at the end of the “year of acclimatization” all the benefits detailed above for new immigrants will apply to him, but the “year of acclimatization” will be considered part of the exemption period.

For more on the year of acclimatization for a new immigrant click here.

To submit a request for a year of acclimatization click here.

Tax credit points for new immigrants

Another important benefit is the granting of tax credit points for a period of four and a half years from the date of immigration to Israel. Immigrants who immigrated from 1.1.2022 will receive tax credit points as follows:

In the first 12 months of immigration – 1 additional tax credit point.
In the next 18 months – 3 additional tax credit points.
In the next 12 months – 2 additional tax credit points.
In the next 12 months – an additional tax credit point.

Immigrants who immigrated before 1.1.2022 will receive tax credit points for a period of three and a half years, as follows:

In the first 18 months of immigration – 3 additional tax credit points.
In the next 12 months – 2 additional tax credit points.
In the next 12 months – an additional tax credit point.

The value of one tax credit point in the 2023 tax year is 2,820 NIS per year

Real estate tax benefits for new immigrants

A new immigrant is entitled to a discount on the payment of acquisition tax when purchasing a residential apartment or business property (or land intended for their construction), provided that they will be used by the immigrant and were purchased in Israel during the period between one year and up to seven years after the date of immigration to Israel. The benefit can be received only once for residential property, and once for a business. Additional information in Real Estate Taxation Procedure No. 1/2023 that the Tax Authority published in January 2023.

Acquisition tax rate for immigrants from 16.01.2023 to 15.01.2024:

0.5% on the part of the property value up to 1,928,220 NIS.
5% on the part of the property value above 1,928,220 NIS.

Business assistance for new immigrants

Business entrepreneurship encouragement program

Many are not aware that the Ministry of Aliyah and Integration operates a program to encourage business entrepreneurship for new immigrants. The program includes providing loans and advisory meetings that will allow new immigrants to establish businesses, engage in entrepreneurship and develop existing businesses. Assistance is provided at five business centers for immigrants and returning residents (Ma’a lot). For submitting an application for assistance, click here.

Assistance for startups

The Ministry of Aliyah and Integration provides assistance to new immigrants in establishing startups, from the stage of mapping needs to developing a business model, financing loans under preferential terms, business support and more. To submit a request for assistance in establishing a startup click here.

Notes and comments

Gifted asset – As opposed to an asset received through inheritance (as detailed above), income generated from an asset received as a gift after the date of immigration will not be eligible for tax benefits.
Mixed activity – A new immigrant who generates income from personal endeavor, where part of the work was performed in Israel and part of it outside Israel – the part produced in Israel is not eligible for exemption. In such cases it is possible to split the income from the mixed activity and pay tax in Israel only for the part that was performed in Israel, calculated according to the number of days of stay. This situation can be disputed in certain cases, and it is advisable to consult with professionals on the matter.
Additional benefits – This article focused on tax benefits for new immigrants. It is important to note that the State of Israel invests significant efforts in encouraging immigration through a range of additional benefits – exemptions and discounts on car purchases and personal imports, customs exemption on the import of goods, municipal tax discounts, financial assistance (absorption basket, public housing and social benefits) and more.

End of exemption period

It is very important to be ready and to plan in advance the end of the exemption period. Our firm has extensive experience in assisting new immigrants in reducing tax risks in Israel and abroad and maximizing the benefits available to them. Click here.

In summary

While the State of Israel provides extremely generous tax benefits for new immigrants, navigating through this process while facing tax authorities, demands early consultation with taxation experts. This ensures immigrants attain appropriate status and optimal eligibility for all available benefits. Nimrod Iron and Co. accompanies immigrants in all matters related to arranging taxation between countries, exercising rights and preventing double taxation.

Additional articles on Israeli Taxation:

Prize-Winning activity

New Immigrant – Tax Benefits

The End of the Exemption Period for a New Immigrant and Senior Returning Resident

Returning Resident and Senior Returning Resident

Israel Resident Tax Aspects

Encourage Immigration To Israel

The post New Immigrant – Tax Benefits appeared first on נמרוד ירון ושות׳.

The End of the Exemption Period for a New Immigrant and Senior Returning Resident

Adam Zur — Sun, 19 Nov 2023 12:38:11 +0000

Amendment 168 of the Income Tax Ordinance establishes an exemption for a “new immigrant” and a “senior returning resident”:10 years of exemption from tax on all income from outside Israel. The exemption applies both to payment of tax and reporting of income and assets. But what happens when the 10 years of benefits end, and those immigrants and returning residents must report all their income from anywhere in the world?

There is a dispute regarding the commencement date of receiving benefits. This dispute of course affects the end of the benefits period issue. When examining a new immigrant or senior returning resident who is nearing the end of the exemption period, we will check when and how they became a resident of Israel, what existing assets they have that are enjoying the benefits, what businesses they are involved in and how to maximize the tax benefits in the ordinance for each case and type of income. In addition, to prevent future disputes with the tax authorities.

In this article, we will detail the exemptions given and what issues may arise at the end of the exemption period.

Business Income

Section 14(a) of the ordinance establishes for a new immigrant and senior returning resident, an exemption from tax for ten years from the date they first became residents of Israel or senior returning residents, on their income from all sources, as listed in Sections 2, 2a and 3 of the ordinance (such as income from work or business abroad, passive income including interest, dividends, pensions, royalties and rental fees), produced or accrued outside of Israel.

At the end of the exemption period, all income must be reported and taxed. Therefore, it is necessary to plan in advance how to maximize the tax benefits contained in the ordinance for each case and type of income. This will include classification and mapping of income for future planning. For example, investing in countries whose treaty with Israel is more lenient, etc.

Capital Gains

Section 97(b)(3) of the ordinance establishes that a new immigrant or senior returning resident are exempt from tax on capital gains from the sale of assets they had outside of Israel, if sold within ten years from the day they became residents of Israel, regardless of the date of their purchase.

Additionally, according to Section 97(b)(3)(3) of the ordinance, a first-time resident of Israel or a senior returning resident are exempt from tax on capital gains they had from the sale of a security of an Israeli resident company whose security is not traded on the Israeli stock exchange on the sale date, provided that on the date of purchase of the security they were a foreign resident.

Regarding a returning resident (regular), the exemption from capital gains tax according to Section 97(b)(2) is valid for ten years from the date of his return to Israel, for the sale of an asset he purchased outside of Israel only during the period when the returning resident had foreign resident status and before he returned to Israel. The capital gains tax exemption also applies to “beneficial securities” (Israeli and foreign traded securities in a bank account that were purchased while he was a foreign resident) by a returning resident.

The provisions of Section 97(b)(3) of the ordinance, state that at the end of the ten years, the exemption for the new immigrant or returning resident (senior or regular) will not be canceled but will decrease linearly. And also, losses will not be deducted for setoff.

Controlled Foreign Company and Foreign Professional Company

A new immigrant and senior returning resident are excluded from being considered residents of Israel in terms of a Controlled Foreign Company (CFC) or Foreign Professional Company (FPC). Meaning that in the years of exemption those residents are considered foreign residents for the purpose of examining the company (CFC and FPC terms).

As stated, returning residents and new immigrants are not considered residents of Israel and therefore do not affect the status of a company as CFC or FPC. But at the end of the exemption, the residents will be considered residents of Israel and the companies in their possession will become CFCs or FPCs according to their nature.

In other words, to the extent that the money (dividends) was not distributed to these residents, in practice during the years of exemption – they will not stand to their credit at the end of the period as exempt but the full tax will be paid on the amounts received by them.

It is necessary to plan and distribute the money before the exemption period ends as much as possible. These are just a few examples of situations where tax can be planned and exemptions utilized even after the end of the period.

In summary, it is very important to plan in advance the end of the exemption period. Our office has extensive experience assisting returning residents and new immigrants in reducing tax risks in Israel and abroad and maximizing the benefits provided to them.

Additional articles on Israeli Taxation:

Prize-Winning activity

New Immigrant – Tax Benefits

The End of the Exemption Period for a New Immigrant and Senior Returning Resident

Returning Resident and Senior Returning Resident

Israel Resident Tax Aspects

Encourage Immigration To Israel

The post The End of the Exemption Period for a New Immigrant and Senior Returning Resident appeared first on נמרוד ירון ושות׳.

Returning Resident and Senior Returning Resident

Ira — Sun, 19 Nov 2023 09:50:02 +0000

Returning Resident and Senior Returning Resident - Tax Exemptions and Benefits

The State of Israel grants a wide range of tax exemptions and benefits to returning residents. The purpose of the benefits and incentives is to encourage the return of quality human capital to Israel, even from countries with more favorable tax policies. The benefits provide financial certainty to returnees and simplify procedures with the tax authorities.

The benefits for returning residents were expanded in Amendment 168 to the Income Tax Ordinance that the Tax Authority published in September 2008. The expansion refers mainly to Senior returning residents, and in fact grants them the rights and benefits of new immigrants.

Senior returning resident definition

An individual who returned to be a resident of Israel after more than 10 years in which he was a foreign resident.

Returning resident definition

Someone who returned to be a resident of Israel after being a foreign resident for at least six years but less than ten years.

What are the changes in legislation regarding the definitions of a returning resident?

Before the amendment was enacted, there was no definition of a Senior returning resident. The amendment equates the status of those defined as Senior returning residents to that of new immigrants in terms of eligibility for tax benefits.

Another change is that before the amendment, eligibility for the status of a regular returning resident was three years as a foreign resident versus six years after the amendment.

The main exemptions

Exemption	Senior returning resident from 2007	Returning resident
Definition	Between 2007-2009 – also someone who returned to Israel after 5 years abroad will be considered a Senior returning resident. From 2009 – only after ten years abroad – will be considered a Senior returning resident.	Until 2009 – someone who left Israel for three years and returned. From 2009 – someone who left for six years and returned.
Business income from abroad	10 years	No exemption
Passive income from abroad	10 years	5 years
Capital gains from abroad	10 years	10 years
Salary from abroad	10 years	None
General “bending” of control and management, Controlled Foreign Company and Foreign Professional Company, exemption from reporting	Exists	None
Are new activities included in the exemption?	Included in the exemption	Not included (except for “beneficial securities” from 2007)
Interest income on foreign currency deposit in the Bank of Israel	20 years	5 years

The new benefits established in Amendment 168 to the Ordinance

In September 2008, Amendment 168 to the Income Tax Ordinance was published, which expands the benefits on the income of Senior returning residents. The ordinance distinguishes between Senior returning residents and regular returning residents and establishes different tax benefits for each category.

Tax benefits for Senior returning residents

Exemption from tax on all types of income – full exemption from taxation for a period of ten years on all assets and income originating outside of Israel. The exemption is granted for all types of income, from passive income from rental fees, interest, dividends, royalties and pensions originating abroad to income originating from a business, profession and additional salaries.
Exemption from capital gains tax – exemption from capital gains tax on the sale of assets outside Israel for a period of ten years From the day he again became a resident of Israe.

* If the asset is sold after the end of the period, the profit accrued up to the end of the ten years period will be exempt and capital gains tax liability will apply only to the profit accrued from the expiration of that date.

* The exemption also applies to assets purchased after the individual became a resident of Israel and sold during the exemption period.

Exemption from income tax on income abroad of a company owned by a Senior returning resident (it is important to distinguish between a company owned by a returning resident and management by him, since any work or activity performed from Israel will be taxable in Israel).
Full exemption from reporting obligation regarding exempt income in relation to a Senior returning resident.
Tax relief on pension even after the exemption period – a Senior returning resident who receives a pension abroad – the first 10 years as stated are exempt from tax, and after 10 years – the amount of tax on a pension originating outside Israel, due to work in a foreign country, will not exceed the amount of tax that would have been paid on that pension in the country where the pension is paid, if he had remained a resident of that country.
Tax benefits on interest income from a foreign currency deposit for a returning resident – Interest income on a foreign currency deposit in the Bank of Israel will be exempt from tax for a returning resident for five years from the day he returned to Israel, provided that the source of the funds deposited in the deposit originated from money accrued during his stay abroad.

Tax benefits for regular returning residents

Exemption from tax on passive income – a returning resident is entitled to a full exemption from taxation for a period of five years on passive income including pensions, royalties, rental fees, interest and dividends on assets outside Israel that were purchased when the resident was not an Israeli resident.
Exemption from capital gains tax – a returning resident is entitled to an exemption from capital gains tax for a period of ten years on the sale of assets abroad which he purchased only during the period when he was a foreign resident. Capital gains tax on an asset sold after the expiration of the exemption can apply only to the profit accrued thereafter.

Year of Acclimatization

Section 14(b) of the Ordinance establishes the mechanism of the “year of acclimatization” which allows the returning resident the option to continue to be considered a foreign resident for one year from the date of return to the Israel. The operation of the mechanism depends on the individual’s choice. If the individual chooses not to use this mechanism, his tax status will be determined according to the Ordinance. If the individual chose to activate this section and subsequently decided to settle in the country as a resident of Israel for tax purposes, at the end of the “year of acclimatization” all of the benefits detailed above for returning residents will apply to him, but the “year of acclimatization” will be considered part of the exemption period.

For more information about the year of acclimatization for returning residents and new immigrants click here.

Income of a returning resident from work in Israel

It is important to remember that work performed in Israel is not exempt from tax in any case. Senior returning residents who work in Israel are in most cases fully taxable. The tax liability will also apply if the work was performed for the returning resident’s business originating abroad. Our office has dealt with many cases where returning residents performed work from Israel and there was a risk of double taxation. It is advisable to consult with an expert and understand how to act in order to avoid double taxation and enjoy all the benefits due to returning residents.

End of exemption period

It is very important to plan in advance the end of the exemption period. Our office has extensive experience assisting returning residents in reducing tax risks in Israel and abroad and maximizing the benefits provided to them. To read about the end of the exemption period, click here.

In summary

While Israel provides extremely generous tax benefits for returning residents, navigating through this process while facing tax authorities, demands early consultation with taxation experts. This ensures returning residents attain appropriate status and optimal eligibility for all available benefits. Nimrod Iron and Co. accompanies returning residents in all matters related to arranging taxation between countries, exercising rights and preventing double taxation.

Additional articles on Israeli Taxation:

Prize-Winning activity

New Immigrant – Tax Benefits

The End of the Exemption Period for a New Immigrant and Senior Returning Resident

Returning Resident and Senior Returning Resident

Israel Resident Tax Aspects

Encourage Immigration To Israel

The post Returning Resident and Senior Returning Resident appeared first on נמרוד ירון ושות׳.

Israel Resident Tax Aspects

Adam Zur — Sun, 09 Jul 2023 18:05:15 +0000

Israel Resident -Tax Aspects

How is Individual Residency Determined? All Information on Determining Residency and Disconnecting Residency

To determine whether an individual is a resident of Israel or to terminate residency in Israel, it is crucial to establish where their center of life is. When individuals move to a country where the tax rate is lower than that of Israel, it may be advantageous for them to terminate their Israeli residency. However, this is only possible if they fulfill the criteria described below for determining their center of life abroad. The cessation of residency and the determination of residency status have implications for both income tax and social security contributions.

It is important to note- It is not always advisable to sever residency when moving to a foreign country! Sometimes, even if the residency remains Israeli, it is possible to reach a solution where no tax is paid in Israel, but many benefits are still retained.

As a result of the coronavirus pandemic, the concept of “forced residency” emerged, referring to individuals who were compelled to remain in a country solely due to coronavirus restrictions. Our firm manages a wide range of cases related to both the determination and termination of residency, as well as instances requiring agreements with foreign tax authorities.

Our firm has many professionals connected with many countries in the world, and we can help prevent double taxation and combine the severance of residency with the determination of residency in another country.

The center of life test for determining residency in Israel is divided into two tests: The Quantitative test and The Substantive- Quality test.

The Quantitative Test For Determining The Center of Life-

In accordance with section 1 (2) – it is strong that the centre of an individual’s life in the tax year is in Israel-
(A) if he has resided in Israel in the tax year 183 days or more;
(B) if he resided in Israel in the tax year 30 days or more, and the total period of his stay in Israel in the tax year and in the two preceding years is 425 days or more;
Holdings can be contradicted if the substantive life centre test indicates residency in another country. An individual who wishes to claim that despite the existence of the presumption of the days is a foreign resident – will be required to submit Form 1348 in conjunction with an annual report.

New legislative initiatives of the Tax Authority are trying to determine that the power of the day is absolute power and not power that can be contradicted. This will mean that if the legislation passes – it will not be possible to determine that a person who is considered a resident according to the number of days – is not actually a resident thanks to the centre of life test (in contrast to the current situation).

The Substantive- Quality Test for Determining the Center of Life

The substantive-quality test considers the totality of the individual’s family, economic and social ties, including:

The location of their permanent home;
Their place of residence and the residence of their family members;
Place of normal or permanent occupation;
The location of their active and essential economic interests;
Place of activity in various organizations, associations, or institutions.

The test set forth in the case law for determining the centre of a taxpayer’s life is the combined test that includes two components:

One is objective – locating the place where most of the attachments to the assessee are.

And the other is subjective – This also reflects what they mean and where they see the center of their life.

In 2017 the definition of a “foreign resident” was changed as part of the 168 Income Tax Ordinance Amendment. It is now taken to mean a non-resident of Israel who has been abroad for at least 183 days a year and his center of life was not in Israel during the two tax years after these two years.

Tax Resolution 2519/17

An employee sent by a company to work abroad will be considered a resident of that treaty state for the purpose of withholding tax on his income from his salary abroad, provided that the following conditions are met:

The employee stays abroad for 36 months
He owns a permanent home outside of Israel in which he resides
The employee stayed in Israel for less than 75 days and the rest of his family under 85 days in each tax year in which the day of severance applies until the year before the year of return to Israel.
The employee submits tax returns and or is deducted from his income tax in the same country
The employee reported material changes that occurred in his condition (as an eligible foreign worker during the period he was abroad)
The employee will have to file tax returns in Israel and the appendices to the decision each year

Read here the Taxation resolution 2519/17 as published by the Tax Authority – https://www.misim.gov.il/tmmisuyweb/frmShowLinkedAbs.aspx?num=20170037

Residency of diplomats sent on behalf of the state and their families

Section 1 of the Income Tax Ordinance and regulations determines who is a resident of Israel as well as exceptions to the definition.
This includes diplomats sent on behalf of the State of Israel to stay abroad; it has been determined that even though they do meet the terms of the test of residency, they shall still be considered a resident of Israel.
In terms of the diplomat’s family, it has been determined that they will not be considered residents of Israel, therefore it would seem that the legislature fails to take into account the much-needed element of practicality.

It seems that the legislature does understand that the status of the diplomat’s family must be taken into account, since it did so in the matter of foreign diplomats. If so, it can be assumed that the legislature does not want to set rivets regarding the spouse of an Israeli diplomat, since, when examining the severance of residency resulting from a diplomatic mission, the case and its special circumstances must be mapped, and the most appropriate tax planning tailored to each case.

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Encourage Immigration To Israel

Ira — Mon, 14 Mar 2022 13:33:59 +0000

Adjustment year for immigrants and returning residents to Israel

An adjustment year has been set to encourage immigration to Israel for new migrants and returning residents. The adjustment year mechanism is intended to allow the new immigrant or returning resident to examine the decision to settle in Israel over one year in which they will be considered a foreign resident.

The benefit is consecrated in law in Amendment 168 to the Income Tax Ordinance in 2008. The amendment provides for tax exemptions and reporting (for both returning and new residents) in respect to income and assets from abroad.

Section 14 (b) of the Ordinance stipulates the “adaptation year” mechanism which gives the new immigrant and the returning resident the option to continue to be considered a foreign resident for one year from the date of immigration/return to Israel, the operation of the mechanism depends on the individual. If the individual chooses not to use this mechanism, his status in terms of tax will be determined by the ordinance.

How do you announce an adaptation year?

A new immigrant or returning resident of the object in this mechanism is required to notify the Ministry of Immigration and Absorption within 90 days from the date of arrival in Israel in an online form designated for this purpose (online form). The date of arrival in Israel is determined by the day on which the individual arrived with the intention of establishing a permanent home in Israel. A link to the form can be found in the Adaptation Year form.

To fill out the form, you must have a photocopy of your ID card.

What obligations and rights will be imposed on those who have chosen in the year of adaptation?

Double taxation treaties will not apply because the individual is not considered a resident of Israel.
No exit tax will be levied on an individual who left Israel before the end of the adjustment year.
The holding of an individual in a company will be considered as a company in the possession of a foreign resident (also with regard to the Law for the Encouragement of Capital Investments.
The individual will be entitled to exemptions granted to a foreign resident; exemption from capital gains, exemption on income gained from the interest of a bank deposit in a foreign currency.
The individual will be entitled to the “foreign expert” benefits provided for in the income tax regulations.
The individual will not be entitled to credit points given to a resident of Israel.

If at the end of the adjustment year the individual continues to live in Israel permanently, he should be considered a resident of Israel at the beginning of the adjustment year for the purpose of their classification as a long-term returning resident, ie, the ten years of exemption will count retroactively. On the other hand, if the individual decides to leave Israel during the year of adjustment, he will be considered as one who did not immigrate to Israel in the first place and the period in Israel will not interrupt the sequence of years of stay abroad.

This mechanism is significant in terms of facilitating the decision, it gives the option to a new immigrant / returning resident to be considered a foreign resident for tax purposes for one year from the date of their return to Israel and should also be considered in tax planning (even with countries of origin). The decision whether to use or not to use in an adjustment year depends on additional factors (for example – reporting bank accounts in accordance with the CRS regulations) and other factors. Our office advises new immigrants and returning residents in making the decision and planning the most appropriate for their purpose for the purpose of successful and correct absorption in terms of taxes in Israel.

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