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Olim Hadashim: Tax exemption for 10 years
Since January 1, 2007, recent immigrants and returning residents in Israel have enjoyed a tax exemption on income generated abroad for 10 years. However, concerns have been raised about possible retroactive action by the tax authorities. This exemption applies to active and passive income (such as dividends, interest and rent) generated outside Israel.
However, the exemption does not apply if part of the business activity is carried out in Israel. After the 10-year period, taxpayers must declare their foreign assets and income. Advance preparation is crucial to avoid tax surprises. One tip mentions the possibility of postponing the exemption period if actual residence in Israel began later. In addition, certain social security contributions, such as Bitouah Léoumi, may still be due despite the tax exemption.
Talk to the Experts
New immigrants to Israel olim hadashimSince 1/01/2007, residents returning to Israel benefit from a tax exemption. The famous tax exemption for olim for 10 years on income generated abroad.
This exemption is well known among Olim Hadashim, but can't we fear a tax trap and retroactive action on the part of 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 generated outside Israel.
In other words, and this is very important information for people who continue to work after aliyah:
You can avoid paying taxes 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.
Taxation in Israel 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 could 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 & 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 for Olim Hadashim:
If you made aliyah several years ago, but for various reasons have 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. In fact, it is possible to put together a file proving that your actual date of aliyah is later. You could then benefit from a longer period of tax exemption.
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 that some Olim Hadasim receive when they make Aliyah. The Israeli tax authorities do not charge income tax on this income, but the Bitouah Leoumi 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 for Olim Hadashim:
If you made aliyah several years ago, but for various reasons have 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. In fact, it is possible to put together a file proving that your actual date of aliyah is later. You could then benefit from a longer period of tax exemption.
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.
Bitouah Léoumi is capped up to a certain income threshold, so each case must be carefully checked to avoid excessive contributions.
