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Since 1/01/2007, new immigrants to Israel and returning residents have benefited from an olim tax exemption. The famous 10-year tax exemption for olim on income earned abroad.
This exemption is well known among Olim Hadashim, but can't we fear a tax trap and retroactive action by the Israeli tax authorities?
In fact, Israel's General Income Tax Code has established that individuals who immigrated to Israel after 01/01/2007 are exempt with respect to the following income:
- Active business income and earned income generated abroad.
- Passive" income, which does not require "direct" intervention by the recipient. (dividends, interest, rent, etc.)
Such income will be tax-exempt in Israel only if it has been generated by outside Israel.
In other words, and this is very important information for people who continue to work after aliyah:
You can avoid paying tax in Israel on the income generated by your business, provided that your business activity takes place when you are outside Israeli territory.
If a foreign company has its center of control and management exercised by an Ole hadash, it will not be considered a resident of Israel for tax purposes.
If the company has mixed income (income generated partly in Israel and partly abroad), it may also be taxed in Israel. It will therefore not be able to benefit from the tax exemption for olim.
In most cases, the calculation basis recommended by the Israeli tax authorities for the taxation of mixed income is the number of days.
Please note, however, that in the event of existing proof, a different calculation system may be used. (e.g.: Valuation of work carried out abroad VS work invoiced in Israel).
As you've already understood, if you carry on a business partly from Israel, you can't get a total exemption on your income, even during the famous 10-year period following your aliyah date.
Taxation in Israel after 10 years of aliyah.
After the 10-year exemption period, taxpayers must declare their assets, wealth and income outside Israel for the first time.
The end of the 10-year period concerns more and more people.
To avoid unpleasant surprises, a number of things need to be done before the end of the 10-year period.
What will the Israeli tax authorities do?
- The Israeli tax authorities can ask for a retroactive audit of the years of exemption and demand taxes for these years.
- The Israeli tax authorities will do the same for mixed income, which may also be taxed in Israel.
- In such a case, the tax authorities may impose fines, interest and penalties. (In the event of proof of "good faith on the part of the Olé Hadash", fines and interest may be negotiated).
- The tax authorities can also check the actual immigration date and set a new date, which would force some taxpayers to declare their foreign income earlier than expected (it also works the other way round, see below).
Beneficiaries should therefore prepare in advance, at the end of the benefit period, to reduce their tax exposure in Israel in the years following the exemption but also in the years in which they benefited from the exemption period.
Tip :
If you made aliyah several years ago, but for various reasons did not actually come to live in Israel, you can postpone the start of the 10-year period.. This can have far-reaching consequences and tax advantages.
The date of aliyah entered on the Teudat Ole Hadash is not necessarily the date that the Israeli tax authorities will use to calculate the 10 years. It is in fact possible to build a case proving that your actual date of aliyah is later. This will enable you to benefit from a longer tax-free period.
Are all earnings exempt from social security contributions?
Another problem is likely to arise after the 10-year exemption period. Beneficiaries who have not declared any income to the Israeli tax authorities.
However, some incomes are only exempt from income tax, but are not exempt from social security contributions (Bitouah Léoumi).
The most common example is the pension received by some Olim Hadasim when they make Aliyah. The Israeli tax authorities do not charge income tax on this income, but the Bitouah Leoumi does charge social security contributions if the taxpayer has not reached the retirement age valid in Israel, i.e. 67 for a man and 62 for a woman.
Another example: property income earned abroad through commercial rental activities (offices, stores, businesses, etc.).
is to be expected in this case. (In the event of proof of "good faith on the part of the Ole Hadash", fines & interest may be negotiated).
- The tax authorities can also check the actual immigration date and set a new date, which would force some taxpayers to declare their foreign income earlier than expected (it also works the other way round, see below).
Beneficiaries should therefore prepare in advance, at the end of the benefit period, to reduce their tax exposure in Israel in the years following the exemption but also in the years in which they benefited from the exemption period.
Tip :
If you made aliyah several years ago, but for various reasons did not actually come to live in Israel, you can postpone the start of the 10-year period.. This can have far-reaching consequences and tax advantages.
The date of aliyah entered on the Teudat Ole Hadash is not necessarily the date that the Israeli tax authorities will use to calculate the 10 years. It is in fact possible to build a case proving that your actual date of aliyah is later. This will enable you to benefit from a longer tax-free period.
See also: how to invest in an SCI in Israel?
How can the Bitouah Leoumi know?
The Bitouah Leumi is based on declarations made to the Israeli tax authorities. It is therefore possible that once the 10 years are up, the Bitouah Leoumi will take up certain cases and retroactively demand payment of the social security contributions that should have been paid, with fines and interest.
The Bituah Leoumi capped up to a certain income thresholdTo avoid excessive premiums, each case must be carefully checked.
The "Dray & Dray" accounting firm is based in Jerusalem & Tel Aviv.
We provide day-to-day support for your accounting and tax affairs in Israel.
We also have an English-speaking department specializing in business start-ups and accounting issues in England.
Finally, the firm's real estate department handles tax optimization and real estate issues for owners and investors in Israel.
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