The 10-year itch
Did you move to Israel in 2007? If so, this is for you!
In mid-2008, as part of the country’s 60th birthday celebrations, the government introduced legislation to encourage people to move to Israel and for Israelis living abroad to “come home”.
Backdating the legislation to those who first became resident in Israel for tax purposes (see more here) from 1st January 2007, anyone meeting the definition of a First Time Resident (i.e. oleh chadash) or Veteran Returning Resident (those who were non-resident in Israel for at least 10 years before returning [5 years if returning in 2007-2009]) were given an exemption from both paying tax and reporting their income earned from outside Israel.
As we near the half-way point of 2016, there remain just a few months before the first 10-year periods expire. And that raises the question of what someone in such a position should do.
First up, it should be realized that the chances of paying less tax post the 10-year period are almost certainly (close to) nil. So it’s important to start taking into account the fact that you will probably have less disposable income to hand.
That being said, there are certainly some steps that you could take in order to potentially reduce your tax bill. It should be noted that the items below are, in no way, an exhaustive list, and each individual case should be looked at for personal circumstances. Needless to say, taxes in the country of origin should also be taken into account before making any final decisions.
- Interest – since interest accrues over time, only the portion received post the 10-year anniversary that is attributable to post-10 years is taxable. So it’s important to keep the paperwork showing the period for which the interest is being applied, so that it can be properly apportioned.
- Dividends – these are taxed in full based on when received. For public companies, the timing will be out of your control, but it is certainly possible to time dividends from privately-owned companies to occur just before the expiration of the 10-year period.
- Capital gains – these too are time-apportioned, and taxed only on the post-10 year gain. However, the tax law says that this is based on a linear calculation of the gain over the entire period of holding, rather than based on value on the date of the 10th anniversary. It may therefore be worthwhile considering selling your positions before the end of the 10-year period, and perhaps re-purchasing just after. That way, there is a clean break, and the cost price for future sale is clear to all. It should be noted that Israel does no penalize anyone who operates in this way (i.e. selling and repurchasing in quick succession) – other tax authorities around the world do consider this to be a problem.
- Work income – it is especially important in the “change-over” year that there is a clear distinction between amounts earned pre and post the 10-year period. As a reminder, during the exempt period, only work considered to have carried out whilst physically located in Israel is subject to Israeli taxation.
Assuming you meet the criteria that require you to file Israeli tax returns, you will need to open a tax file (if you don’t already have one open for any other reason), and to start reporting – and paying the taxes) accordingly.
Contact me today to discuss your personal circumstances, so that you can prepare yourself for (finally!) paying taxes like all other “regular” Israelis!