How Israel Became a Tax Shelter for Wealthy Foreign Jews

To encourage aliyah, Israel refrains from taxing foreign assets belonging to immigrants and returning residents for 10 years. The Tax Authority is now rethinking this policy.

About a week ago, the police entered luxury homes in Herzliya Pituah owned by French Jews suspected of tax evasion and money laundering in France. The case was part of a worldwide investigation tracing $5 billion that rich Jews were suspected of hiding in Israel.

“They think Israel is a country of refuge that will protect Jews, but they’re mistaken,” said a legal source on the cooperation between Israeli and French police on the case.

But that’s not entirely true. The French Jews suspected of tax evasion have good reason to think Israel is a country of refuge for Jews. Israel is their tax shelter, just as Bermuda is for others.

Israel been a tax shelter since around 2003, a role that dramatically expanded in 2008 with Amendment 168 to the Income Tax Ordinance. The amendment made new immigrants and returning Israelis exempt from taxes on foreign assets for 10 years.

In contrast, all other Israeli citizens must pay tax in Israel on all income earned around the world. The change was intended to make aliyah more attractive by giving new immigrants and returning Israelis time to get acclimated and decide whether to stay. They wouldn’t be bothered by the tax authorities.

In 2003 this acclimation period was five years, and in 2008 it was extended to 10. Then, new immigrants and returning residents were also exempted from reporting  foreign assets to Israel’s tax authorities. Where their money came from was no longer the business of Israel's tax man.

At first glance, nothing would seem simpler. If Israel wasn’t going to levy income tax on these assets for 10 years, why ask for information on them?

In practice, these two benefits turned Israel into a deluxe tax shelter for rich Jews from abroad. After the change, they could move to a country where they are exempt from reporting or paying taxes on much of their assets.

So it’s easy to understand why a Jew with assets around the world jumped on the chance. Even for law-abiding Jews it provided a legitimate option to lower their tax bills.

Go for the management fee

The most attractive element concerned capital gains. Most developed countries (though not the United States) levy taxes on residents. The moment Jewish citizens move to Israel, their countries of origin don’t collect capital gains tax from them, even if it involves selling an asset in the original country worth millions. At the same time, Israel isn’t charging them capital gains tax because of Amendment 168.

But taxes are supposed to be paid in the country of origin on other profits; for example, from managing companies. Yet if a Jewish businessperson who moved to Israel received his foreign company's profit as a management fee, he could avoid paying taxes abroad and would be exempt from paying taxes in Israel.

Amendment 168 was passed around the time the world entered a financial crisis and many countries sought ways to increase tax revenues. As a result, the tax burden on the rich in many developed countries increased. Some of these rich people, while looking to evade the tax man in their home countries, discovered the Israeli tax shelter.

The apartments bought by French Jews in Israel, which helped increase housing prices, are just one expression of this. The Tax Authority suspects that veteran Israelis have discovered this method and are using immigrants to shield their own foreign assets from taxes.

The possibility of using Amendment 168 for tax evasion and money laundering has made the Tax Authority rethink the situation. Contributing is other countries’ resentment of Israel as a tax haven that interferes with their own tax investigations.

Meanwhile, Israel wants to be part of the trend among tax authorities around the world to increase enforcement and prevent tax evasion by the rich. Israel doesn’t want to be an outcast.

After all, the rich Jews who immigrated to Israel in part due to Amendment 168 didn’t bring their businesses here, where these firms would be taxed. Consequently, their relocation didn’t create jobs, or, of course, increase tax revenues. In addition, the exemption from reporting foreign assets raises the fear that at the end of the 10 years it will be hard for the Tax Authority to levy the appropriate taxes on rich immigrants who benefited from the amendment.

“They contributed to demand and growth,” says Gidi Bar-Zakay in defense of the amendment. Bar-Zakay headed the Tax Authority’s legal department when the amendment was approved. Still, he says, “Israel could be smart and offer to extend the tax exemption another 10 years on condition that the wealthy immigrants invest at least $100 million in creating businesses in Israel.”

Now the Tax Authority is trying to reduce Israel's use as a tax shelter and at least end the exemption from tax reporting starting this January. A previous attempt to end the reporting exemption a few months ago failed when accountants and tax advisers lobbied against it in the Knesset. It remains to be seen if pressure from other countries will help the Tax Authority overcome the opposition.

Ofer Vaknin