10 year exemption for new residents – the background
In the 1990’s the Israeli government introduced a set of tax exemptions for Olim Chadashim, on income that they earned abroad. They did this with the intention of encouraging Jews from the diaspora to move to make Aliya and move to Israel.
With effect from 1st January 2007, the Israeli government adopted the Tax Reform 168, which further broadened the tax benefits for Olim Chadashim, granting the tax exemptions on foreign income for 10 years after making Aliyah.
What incomes are tax exempt for an Oleh Chadash and how long for?
Generally speaking, income earned abroad by an Oleh Chadash within their first 10 years as a new Israeli Tax Resident, will not require reporting and will be tax exempt in Israel.
- Dividends from a foreign company.
- Rental income from real estate located abroad.
- Interest received from financial institutions abroad.
- Pensions from abroad.
- Capital gains on the sale of foreign shares, real-estate or other assets and investments.
- Income earned for providing services whilst the Oleh Chadash was abroad.Which incomes does an Oleh Chadash pay tax on?
What were the benefits for individuals who made Aliya before 2007?
The new rules are aimed at Olim who made their Aliya after 1st January 2007. However, Olim who made their aliya before this date benefit from the following exemptions:
- Exemption for 5 years following their aliya on « passive » income, such as: Interest, dividends, pensions, copyright, and rental income received on real estate located abroad.
- Exemption for 4 years following their aliya on « active » income, such as: Professional activity income from an activity abroad which was active at least 5 years before the date of the alya. That is, the company had to be active for at least 5 years before the Aliya, so that the income received through this entity, after the Aliya, would be exempt for 4 years.
- Exemption for 10 years following their aliya on capital gains realized on the sale of foreign goods and investments, which were purchased before the date of aliya.
- Getting paid into a foreign bank account does not impact the source of the income.
For example, if you receive rental income from real estate in Israel, but receive the payment to your USA bank account, the income will still be treated as earned in Israel and taxable accordingly.
- Similarly, the location of your employer does not impact the source of income. So, if you work in Israel for a US employer, your income is treated as earned in Israel and taxed accordingly.
- The tax benefits provided by the Israeli government to Olim Chadashim, is only an exemption from Israeli reporting and taxation. However, you may still be required to report and pay taxes on your income in the country where the income is earned.
For example, rental income from real estate in England, may be exempt from Israeli taxation but will still be taxable in England.
- If you lived in Israel prior to making Aliya, your tax benefits may have started prior to your date of Aliya. Usually, this will be detailed on your Teudat Oleh. However, it is recommended to take professional advice in these circumstances.
What are the income tax rates on Israeli Source income?
Use our software to calculate how much tax you’ll have to pay in Israel. It’s simple, quick and easy. Just answer a few questions and see your result. Click below to open our income tax calculator. Or, Read our article: Income Tax Rates in IsraelIncome tax calculator
Your Questions – Our advice:
What happens after the 10-year exemptions for an Oleh Chadash?
Should I « relocate » my foreign company to Israel? What are the tax advantages of doing so?
Do as an Oleh Chadash need to declare the pensions received from abroad?
What are the tax benefits for a Toshav Chozer (Returning Resident)?
Israeli taxation offers several advantages to people wishing to make their Aliya. Before taking the step, it is important to prepare properly and to avoid any tax complications in the future.