Days Are Numbered for Tax Exemption for New Immigrants to Israel

Legislation to rescind the exemption was pulled, but international pressure to do away with it is growing.

Nir Keidar

Just a few weeks ago, it looked one of the most alluring tax benefits that Israel offers to new immigrants and returning citizens was about to disappear. The government had attached a clause to the Economic Arrangements Law, which accompanies the annual budget, that would end the exemption from reporting income and assets abroad that is granted to these groups. But Immigrant Absorption Minister Zeev Elkin opposed the plan, and with little time to reach an agreement with the Tax Authority on how to amend it, the clause was dropped from the legislation.

The exemption, which has been in place since 2007, absolves new immigrants and returning Israelis from reporting their foreign income or assets to the tax authorities for the first 10 years they live in the country. This includes salary, income from rentals or businesses, interest and dividend income, royalties as well as capital gains earned overseas. The Tax Authority didn’t want to do away with the exemption of paying the tax itself but it did want individuals to file a tax report. This would create more transparency and allow the Tax Authority to share information with tax agencies abroad as part of a global crackdown on tax evasion.

The tax collection agency is determined to do away with the reporting exemption, if not via the Arrangements Law, then through separate legislation, but those in the know say it’s unlikely to happen any time soon. Oz Halabi, an expert on international taxation living in New York and a former tax official who helped devise the original exemption, said he expects the measure to be rescinded over the next few years, if not through legislation then through tougher international standards. He anticipates that pressure from the Organization for Economic Cooperation and Development, the global club of the wealthiest nations, is likely to leave Israel with no choice but to abandon the exemption.

“The day is coming when information about the businesses and assets of a person will be available to every tax authority. Even if Israel were to opt to maintain the reporting exemption, at some point OECD member countries and the organization itself may force Israel to cancel it,” he said. Not complying with the OECD could mark Israel as a black sheep among responsible countries. “Israel, like any other Western country, wants to avoid this label as much as possible,” said Halabi.

Since 2013, the OECD has been engaged in a program called Base Erosion and Profit Sharing, which aims to stop multinational companies from moving taxable income to low-tax countries from high-tax ones. Among the program’s goals is to stop intangible assets from being moved from one place to another for tax purposes. As an OECD member, Israel will have to conform with OECD standards in its bilateral tax treaties, at least those it has signed since 2006.

Halabi stated that under Israel’s current bilateral tax treaties, immigrants and returning Israelis are subject to tax rates in the country where their income originated, unless the treaty states otherwise. But last May, the United States issued a new model for tax treaties. According to the model, a taxpayer earning income in the U.S. but exempt from tax in his or her country of residence will still be subject to U.S. taxes, even if an existing tax treaty has previously exempted him or her from paying them. This standard is likely to be adopted by other OECD countries.

In other words, the tax exemption Israel grants new immigrants and returning Israelis will be rendered meaningless because they will be taxed in the country where their income originated. Worse still, because the tax will be deducted in the originating country and thus based on income before expenses, the rate will be particularly high. If the tax were paid in Israel, it would be based on income after expenses and the rate would be lower. Immigrants and returning Israelis would have every reason to support rescinding their Israeli exemption in order to qualify for the lower tax rate.

According to Halabi, people who qualify for an exemption can request that it not be applied, and pay tax in the U.S. voluntarily, but the American government is not likely to accept this in lieu of paying regular income tax, calling it a “voluntary tax” and disregarding it.

Many immigrants and returning Israelis like the exemption not because it saves them money on taxes but because they don’t have to report their earnings altogether, thereby preventing their home countries’ tax authorities from discovering their income and assets. But Halabi says that the OECD soon won’t accept the excuse that governments simply doesn’t have the information because the law doesn’t require reporting, which is the case in Israel.

In any event, the tax collection agency has everything to gain from collecting and sharing this information with other tax authorities. “Today a growing number of countries, among them Israel, are interested in expanding information-sharing provisions,” said Halabi, citing Israel’s compliance with America’s Facta (Foreign Account Tax Compliance Act), which requires Americans and foreign financial institutions to annually report on the size of their financial accounts. “It’s clear that countries will not share [tax] information with Israel without getting information back from Israel — it’s a game of give and take,” he said.