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 Israel.
*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.
