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.
