Following is a detailed outline of the new reform:
1. New tax status - ?a returning resident classified as a new immigrant for tax purposes? and the extension of the tax exemptions that are currently granted to new immigrants to Israel (Olim) and returning residents.
The new status will be granted to individuals who have been resided abroad at least 10 years before their return to Israel. However, under a temporary order, former Israeli residents who will be returning to Israel during the years 2007, 2008 and 2009 will be granted the new tax status even if they have been resided abroad only 5 years before their return to Israel.
New immigrants to Israel and returning residents (classified as a new immigrant for tax purposes) will enjoy a ten-year exemption from Israeli taxes on foreign assets and on any income generated abroad, including foreign salaries and foreign passive income (interest, dividends, royalties and rental income). The provision applies to all new immigrants and returning residents who arrived in Israel as of January 1, 2007.
The 10 years exemption is also granted for capital gains on the sale of asset located outside Israel whether the asset acquired prior to the immigration or returning to Israel or after it. It should also be noted that even if the asset will be sold after the 10 years exemption period, the gain would not be taxed retroactively but only from the end of the 10 years period in a proportional manner.
2. Tax measure relates to foreign companies managed and controlled by new immigrants and returning residents.
Foreign corporations controlled by new immigrants or returning residents will not be considered Israeli residents for tax purposes merely as a result of their being managed and controlled by the new immigrant or returning resident. In this way, new immigrants and returning resident can earn income tax-free for ten years from any foreign company they control as long as the income is not generated in Israel.
3. Reporting Exemptions.
New immigrants and returning resident will be exempt from Tax Authority reporting requirements (tax returns and capital declarations) regarding any income generated abroad or any foreign assets. However, any income generated in Israel after their immigration or return to Israel will be reported and taxed according to existing regulations.
4. Absorption Track.
A new immigrant and returning resident will have one year from the date of immigration or returning to Israel to decide whether or not to be considered an Israeli resident for tax purposes. During this absorption period, the new immigrant and returning resident will be able to make a careful decision about where he would like to become a legal resident. In order to be entitled to the absorption period, the new immigrant or returning resident must inform the tax authority about his intentions not to be considered Israeli resident for tax purposes within 90 days from the date of immigration or returning to Israel.
The new tax reform will undoubtedly increase Israel's attractiveness to high-net worth individuals who would like to enjoy a low tax regime.
עדי מנטל, עו"ד
http://www.califtax.co.il
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