What's 10 years?
In January 2007, a reform came into force, allowing new immigrants and returning residents to benefit from exemption from declaration and taxation of foreign income for a period of 10 years in Israel.
The end of the period of tax benefits, and therefore the approaching obligation to declare those that have come to an end, is raising fears of retroactive payments in some cases.
Who is concerned? What to do in the event of an inspection by the authorities?
Several attempts to cancel the exemption
It's been over ten years since the reform that grants a 10-year tax holiday to new immigrants came into force.
Exemption is granted on all active and passive income generated abroad (we emphasize this critical point here)whether from capital gains, investments or other ongoing sources of income abroad.
Over the years, several attempts have been made by the tax authorities to cancel this exemption, but to no avail.
Even in the current law the tax authorities tried to introduce a clause that would reinstate the reporting requirement, but it was removed, so the benefit is still relevant for new immigrants and returning residents arriving in Israel.
From 0% to 50% in taxes? Not sure...
In Israel, new immigrants and returning residents benefit from a 10-year tax exemption on income earned abroad.
This tax-free period is coming to an end for those who arrived a decade ago.. From January 2017, they will have to start declaring all their foreign income and taxing it accordingly.
However, since these people have never declared or have only declared income in Israel, the scope of the declaration is unknown.
This means that these new immigrants and returning residents should expect scrutiny of their income, and should ensure that they have accurate records to protect themselves in the event of a tax investigation.
People who arrived more than 10 years ago must therefore file a tax return the following year (N+1), and thus enter into a spiral of filing tax returns every year on their foreign income.
This can be a complex process, especially for those who have never had to declare their foreign income before.
It is therefore advisable to consult a tax advisor for professional advice on how to declare foreign income correctly.
There are so many ways to optimize your tax situation in Israel that a simple consultation can save you tens of thousands of Shekels and a lot of hassle with the Israeli tax authorities.
Do you have a question?
Food for thought
- Taxpayers should be aware that if they have not declared their income generated in Israel, the Israeli tax authorities may carry out a tax audit on income over the last 10 years, even if this income was supposed to be exempt.
- It is important to understand that if no declaration has been made, there is no statute of limitations for the tax authoritiesSo it's crucial to declare all your income correctly.
- New immigrants and returning residents should expect a thorough examination of their finances, given that they have never declared or have only declared income in Israel.
What about the Bitouah Leoumi?
The approach to the reporting obligation raises questions among taxpayers about reporting. They also stem from the possibility of payment arrears, particularly on the Bitouah Leoumi side, as well as the possibility of retroactive review by the tax authority to determine whether they were indeed eligible for tax exemption.
This happens in cases where the answer to the question of when they should arrive in or return to Israel - before or after the start of 2007 - is unclear.
French retirees who have decided to be taxed in Israel only.
The French tax authorities may ask to see proof that you have declared your retirement in Israel. (Even during the 10-year period).
If you are concerned by this request from the French tax authorities, please do not hesitate to contact us.
Bitouah Leoumi exemption is not possible
The reform was designed to encourage aliyah and return to Israel, and extended the package of tax breaks that had been in force until then. It came into force retroactively in January 2007.
In addition, it has been decided that the same immigrants and returning residents are entitled to one year, out of ten, of adjustment, during which they will not be considered residents for tax purposes and will be able to review their adjustment.
Uncertainty persists regarding national insurance contributions in Israel - Le Bitouah Leoumi. New immigrants and returning residents have indeed been exempt from income tax on income earned abroad, but no exemption has ever been established for national insurance on that same income, so they would, in theory, have had to pay national insurance contributions.
On the other hand, the National Insurance did not know that they had income abroad and considered them inactive (if they had no income in Israel) or only had to pay National Insurance contributions for income in Israel (if they did).
How Israel's tax reform affects new immigrants and returning residents
Tax reform in Israel has important implications for new immigrants and returning residents.
For example, a doctor who left Israel, opened a private clinic in Spain and returned after 10 years to Israel, continuing to work in a hospital in Spain and operating the clinic there on certain days of the week, would be subject to taxation on his income only abroad for 10 years.
However, by choosing the year of adaptation, when he will not be considered an Israeli resident for tax purposes, he will be able to benefit from a tax exemption on income received from the hospital in Spain and on his share of the private clinic's profits. However, if he has salary income from his work in a hospital in Israel, he will have to pay taxes on this income.
His wife's situation is different: she has sold a company she set up in Spain two years after their arrival in Israel. She will be exempt from tax on the capital realized from the sale of the business.
It is important to note that tax reform in Israel can be complex, and it is advisable to consult a tax advisor for professional advice on how to correctly declare overseas income and protect against any tax investigation.
Do you have a question?
The French government also expresses its fears
The State Comptroller recently referred to this in a report which highlighted shortcomings in the activities of the Tax Authority, with regard to the taxation of the income of Israel's residents abroad. "Another ambiguity concerns workers considered new immigrants, returning residents or regular residents. These workers are exempt from taxation on their income abroad, but are not exempt from national insurance contributions on that income.
However, as they are exempt from declaring their overseas income for ten years, the National Insurance does not have the practical ability to compel them to pay National Insurance contributions, based on declarations provided to the Tax Authority."
It's safe to assume that few, if any, have bothered to declare their income to National Insurance.
The concern is that when these workers declare their income to the Tax Authority now, National Insurance will also require them to pay retroactively for 10 years in Israel, which could prove substantial.
How to deal with the tax authorities?
Tax administration is often perceived as intimidating and difficult to understand, which can cause stress and anxiety for taxpayers. However, it is important to know how to deal with the tax authorities, and to understand your rights and obligations as a taxpayer.
Know your rights and obligations
First of all, it's crucial to know your rights and obligations as a taxpayer. Taxpayers have the right to challenge a decision by the tax authorities if they believe it to be wrong. They also have the right to be informed about how their taxes are calculated and about changes in tax law.
Taxpayers also have obligations to the tax authorities, including declaring all their income and paying taxes due on time. Taxpayers must also keep accurate records of their finances and retain supporting documents for a specified period of time.
Before contacting the tax authorities, it's important to prepare by gathering all relevant documents, such as tax returns, bank statements and expense receipts. It is also beneficial to familiarize yourself with the tax laws and policies of the tax authorities to better understand the questions that will be asked.
It's also important to bear in mind that the tax authorities may carry out random or targeted audits, so it's essential to keep accurate and complete records, and to have them to hand in case of need.
Be honest and transparent
When dealing with the tax authorities, it's important to be honest and transparent. Hiding or falsifying information can have serious consequences, such as fines, prosecution or even prison sentences.
It is preferable to provide accurate and complete information, even if it may be unfavorable. Taxpayers can also discuss their concerns with the tax authorities and seek to resolve problems amicably.
Consult a tax advisor
If taxpayers are concerned about their tax situation or have questions about how to deal with the tax authorities, it is advisable to consult a tax advisor. Tax advisors are professionals who can provide advice on tax issues and help resolve problems with the tax authorities.
However, it's important to choose a qualified and experienced tax advisor to avoid mistakes and future problems.
In conclusion, dealing with the tax authorities can be daunting, but it's important to know your rights and obligations as a taxpayer, prepare properly, be honest and transparent, and consult a tax advisor if necessary. By following this advice, taxpayers can effectively manage their tax situation and avoid problems with the tax authorities.
Mixed income - the real headache
There are also more complex cases, for example when the company and income are abroad, but part of the activity was carried out in Israel.
"There are a lot of grey cases. For example, a lawyer from a British firm who came to Israel and continued to work in Britain, but recently started representing Israeli clients as well. What should he do in such cases - divide income according to days? Hours? There's also the problem that a lawyer's hourly rate abroad is much higher than in Israel. The tax authorities need to take this into account."
There may also be cases that could be considered in the grey zone, for example those who have stayed abroad for five years but not continuously, or students who have gone to study abroad and returned for visits.
The question is whether the tax authority will look back at these cases and begin residency examinations, or whether it will take a more flexible approach and allow arrangements in uncertain cases.
The correction could also affect businesses that have been operated until now by a new immigrant or returning resident, as these businesses have benefited from a special tax exemption in Israel for a decade.
After the end of the exemption period, companies may be considered "Israeli residents" under the Control and Management Examination, which may result in double taxation with another country.
In a nutshell:
This article deals with the issue of the 10-year tax exemption in Israel for new immigrants and returning residents. This tax exemption allows these people to pay no tax on income generated abroad for the first 10 years of their stay in Israel.
However, this period is coming to an end for those who arrived a decade ago, and they must now start declaring all their foreign income and taxing it accordingly.
The problem is that, for these new immigrants and returning residents, it is difficult to know what information needs to be declared, as they have never declared or have only declared income in Israel. This means that these people must expect scrutiny of their finances and must ensure that they have accurate records to protect themselves in the event of a tax investigation.
It is therefore crucial that taxpayers are aware of their rights and obligations as taxpayers, and prepare themselves properly by gathering all relevant documents, such as tax returns, bank statements and travel receipts.
It is also important to consult a tax advisor for professional advice on how to correctly declare foreign income and protect yourself against any tax investigation.
In conclusion, for new immigrants and returning residents in Israel, the end of the 10-year tax exemption means that they must now declare all their income abroad and tax it accordingly. It is important to keep accurate records, to consult a tax advisor to avoid any problems with the tax authorities, and to know one's rights and obligations as a taxpayer to avoid problems with the tax authorities.
Anyone finishing their 10 years in tax-exempt Israel must start declaring all their worldwide income.
The fear is about income that should have been declared during the 10 years and wasn't.
The Israeli tax authorities can tax them retroactively.
Do not hesitate to contact us to update your tax file in Israel.
Your questions - our advice
- What happens after the 10-year exemption?
- Can I "copy" my French company in Israel? What are the tax advantages in this case?
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