Analysis

Israel’s Shame: A Billionaire Tax Exemption Born in Sin

The law that grants benefits to immigrants and returning Israelis is only of help to a handful of the very rich. When the benefits run out, the billionaires run away

Benjamin Netanyahu with son Yair, wife Sara and actress Kate Hudson at a party at Hollywood producer Arnon Milchan's home, 2014.
Avi Ohayon / GPO

The so-called Milchan Law, which allows immigrants and returning Israelis  a 10-year exemption from reporting or paying taxes on their foreign income, was born in sin. From day one, it damaged Israel’s reputation and pocketbook, and along the way it landed Prime Minister Benjamin Netanyahu with an indictment for fraud and breach of trust.

But that’s not all: It has become clear from an article in Tuesday’s TheMarker that many of the millionaires and billionaires who took advantage of the law left Israel after the benefits expired.

In the last decade, attorney Pinhas Rubin has worked with politicians and the Israel Tax Authority to help his clients, among them Israeli-American Hollywood producer Arnon Milchan, win exemptions from tax or reporting on income generated overseas. He succeeded in his task and the Milchan Law was passed.

The way the exemptions are structured make them irrelevant for immigrants and returning Israelis who aren’t rich. It’s a law designed entirely to fit the needs of a few hundred millionaires and billionaires. It doesn’t exempt anyone from taxes for income earned in Israel, but it does help lower their tax bills in their countries of origin. Milchan, Teddy Sagi and others from the top percentile jumped at the opportunity.

Israel has long been subjected to sharp criticism from international organizations for letting itself become a tax haven for tycoons. The state comptroller had opposed the amended tax law that made the new system  possible, and the Finance Ministry has tried again and again to have it repealed.

“The reporting and tax exemptions that were granted to immigrants and returning citizens were intended to encourage immigration and repatriation to the country, but the broad reporting exemption can create the incentive to launder money or use money that was laundered abroad,” then-Comptroller Joseph Shapira wrote in a 2013 report.

But money laundering and the loss of billions of tax revenue can’t compete in the Israel of the 2000s against the interests of the rich and the politicians whose services they buy.

Thus wrote Attorney General Avichai Mendelblit in February when he informed Netanyahu he would be indicting him: “In 2013, Milchan approached you with a request to take steps to promote a rule that would extend the exemption given to returning residents from reporting or paying income tax.” The prime minister did act in this regard and only the gods of legal reasoning can explain why neither was charged with bribery – in particular why Milchan wasn’t charged as Arnon Mozes and Shaul Elovitch have been in cases 2000 and 4000, respectively.

In February 2017, when the police were trying to find out what Milchan got from Netanyahu in exchange for cigars and Champagne, TheMarker published a column called “Who Keeps Giving Billionaire Arnon Milchan a Lavish Gift Every Year?” The column, it seems, played a significant role in exposing the connection and leading to an indictment.

Today it’s clear that the tax advantages didn’t even convince billionaires to make their homes in Israel. First, from the moment the exemption expired, most of those who had enjoyed the benefits returned to their old homes abroad.

Second, during the 10 years in which they enjoyed the benefits, they didn’t really make their homes here. They mainly pretended, if at all, to be residents because initially they weren’t required to be Israeli residents in the conventionally accepted sense of the word. In practice, most of the billionaires were traveling overseas and moving their children from one school to another to enjoy the most favorable tax regime.

Even if using a tax shelter is technically legal, economically and morally it’s an act of deception. With the help of Rubin and Ehud Olmert, who was prime minister when the law was amended, the wealthy enjoyed outrageous tax benefits that deprived the state of revenue and embarrassed it at international institutions. The politicians ignored the critics. They even tried to extend the benefits to 20 years. In the end, the billionaires just got up and left.