K2410 Version 1.1 / 31.10.2023 / English
Many Olim mistakenly think that the tax holiday exempts you from paying Israeli tax if you are working for a company located outside of Israel. For example, if a US company is paying you a salary and transferring it directly into your US bank account – wouldn’t that be considered foreign income and therefore exempt? The short answer is no.
When it comes to determining your income tax responsibilities, the location of the company (or your bank account) is far less important than where you are physically located while performing your duties. If you are living in Israel while you are earning your salary, that salary would be Israeli-sourced income and would not fall under the Aliyah exemption.
Many Olim are under the impression that in order to make the most of their Aliyah tax holiday they must sell their non-Israeli investments prior to the end of the ten years. This strategy is often based on a misunderstanding of how the Israeli tax would be calculated if you were to sell your holdings after ten years. Generally, when non-Israeli investments are sold after your ten years are up, the portion of the gains that are attributed to your tax holiday would still be exempt from Israeli taxation.
Let’s look at a simplified example to better understand this concept: Say I bought a US stock for $100 three years after making Aliyah. Ten years later (three years after the end of my holiday) I sell the stock for $150. In this case I would pay Israeli tax on only 30% of the $50 profit, because seven out of the ten years were part of the Aliyah tax holiday. Note that the actual calculations are a bit more complicated (done on a linear day-count basis) and usually involves taking the exchange rate on the date of sale to determine both the sale price and cost basis in shekels.
American citizens, who in any event are still liable to pay US taxes on gains, should be extra careful before selling their investments and realizing gains. For many Americans, it makes sense to continue to maintain the bulk of your long term investments outside of Israel even after the 10 years have concluded.
Many assume that the tax “holiday” ends at the end of the tax year, ten years after you made Aliyah. Like we mentioned above, the actual date when the holiday ends is ten years from the day you became an Israeli tax resident. For example, if you moved to Israel on July 15th, 2011 – your Aliyah tax holiday would have ended on July 15th, 2021. For Olim with non-Israeli sourced income, the transition year can be complex – some of the income earned in that year would not need to be reported while other income earned in the same year would require reporting.
A comprehensive review of your situation with a knowledgeable Israeli accountant prior to the end of your holiday is recommended. This is especially the case if you have significant assets outside of Israel.