Tax Benefits for Olim
As always, it is very important to get tax advice from a qualified accountant with specific understanding of these tax issues and your situation. This article’s purpose is to help you prepare questions for an accountant, not make complex tax decisions on your own.
When do the tax exemptions begin?
When does the clock start ticking on your ten years? For many, it may be the day you get off the plane but for others it might not be nearly as simple. The clock starts ticking for ten years from the day you become an Israeli tax resident. In certain circumstances you can become a tax resident in Israel long before you make Aliyah or even long after – depending on the “center of life test“. Generally, one is more likely to be considered an Israeli tax resident if:
- You are in present in Israel during a given tax year for 183 days or more.
- You have been present in Israel for a combined 425 days or more during the current tax year and the two previous years.
- If one is becoming an Israeli citizen but not yet planning on living in Israel full-time, careful tax planning is important.
Passive income only?
Working for a non-Israeli company
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.
Realizing capital gains
General rule
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
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.
Non-Americans
For non-Americans the story can be very different for a few reasons:
- Some non-Israeli assets that are sold within the ten year tax holiday will not be subject to tax from any country. Selling them prior to the end of your holiday can simplify your Israeli accounting in the future.
- Non-Americans may want to consider transitioning to Israeli based investments as they are nearing the end of their Aliyah holiday. Many Israeli based investments offer the opportunity to avoid Israeli tax reporting and offer some Israeli tax advantages (such as real vs. nominal taxation.)
When the tax “holiday” ends
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.
Important Links
Shivat Zion additions – some important links that provide additional comprehensive information:
*This article was adapted and translated by Shivat Zion. To see the original by Blue & White Finance, click here. The information contained in this article is for general educational purposes and should never be viewed as specific investment, tax, or legal advice.
Working for a non-Israeli company
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.