'Arnon Milchan Law' Turned Israel Into Tax Haven for Billionaires. They Left When It Expired

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Billionaires Arnon Milchan, left, and Teddy Sagi, right.
Billionaires Arnon Milchan, left, and Teddy Sagi, right.Credit: Tomer Appelbaum, Vianney Le Caer / Invision / AP

Last August, media reports said the billionaire Teddy Sagi and his family were leaving Israel. The alleged reason: Sagi wanted to be closer to his business interests in London. His wife and children would initially live in Cyprus and later join him in London.

Sagi indeed has business interests in Britain, notably the Camden Market real estate project in which he has invested hundreds of millions of pounds. But the timing of his departure – 10 years after he settled in Israel – raises the question of whether tax considerations were afoot.

The start of 2017 marked 10 years since a wide-ranging change went into effect that granted new immigrants and returning Israelis exemption from taxes and filing tax statements with the Israeli authorities.

The full story of its impact can now be seen as its provisions expire for its first users.

From left to right: Yair, Benjamin and Sara Netanyahu, with actress Kate Hudson and Arnon Milchan, Los Angeles, June 3, 2014Credit: Avi Ohayon / Government Press Office

This is because at the end of 10 years, all people taking advantage of the law must report to the Israel Tax Authority on their foreign income and pay tax on it. The exemption applies to active and passive income earned outside Israel whether it is capital gains from the sale of assets and investments or income generated abroad, because Israeli law imposes taxes on a personal rather than a territorial basis.

Not surprisingly, the tax authority feared that wealthy Jews were immigrating to Israel for tax reasons – and would leave when the benefits expired, taking their money with them.

The existing law exempts both new immigrants and Israelis returning after being abroad for at least 10 consecutive years – awarding them a 10-year tax holiday. Returning Israelis coming back after six years receive a five-year exemption for foreign-earned income and a 10-year exemption on capital gains tax.

Time to adjust

The idea behind the change is that 10 years would give people coming to live in Israel enough time to adjust to life in their new home and establish roots deep enough that even after the benefits expired they would choose to remain. It hasn’t happened that way.

The man most closely identified with the change is Arnon Milchan, the Hollywood producer cited in the lavish-gifts indictment against Prime Minister Benjamin Netanyahu. He allegedly asked to have the benefits extended from 10 years to 20. They weren’t, and his exemption expired this year.

It’s reasonable to assume that since then Milchan is no longer an Israeli resident for tax purposes and therefore doesn’t report to the Israel Tax Authority or pay Israeli tax on his foreign income. Milchan declined to comment.

Ruth Parasol Credit: Arizak

Also Sagi, Shaul Shani and Ruth Parasol, all of whom lived in Israel and took advantage of the benefits, have left the country and ceased to be residents before they would have to file and pay income tax on their foreign income. It can be assumed that without the tax break, none of them would have moved to Israel at all.

After he sold his holding in Playtech – a London-traded gambling software company – Sagi’s fortune is believed to be in the billions of dollars. When he returned to Israel he made big investments locally, employing thousands of people, donating to charities and paying taxes on his Israeli income. But the state never collected any taxes on his overseas assets.

An example of the huge sums involved is a deal from May in which Sagi sold his 68% stake in the financial-technology company SafeCharge for $600 million. The capital gains tax on a transaction of that size could have reached hundreds of millions of shekels.

How Sagi structured his holdings isn’t known publicly, so it’s impossible to know how much tax he paid and to what country.

In response, Sagi’s group said: “Teddy Sagi made his money outside of Israel and the lion’s share of his activities are outside of Israel. Also, most of his income in recent years originated outside of Israel. Sagi’s investments in Israel are more than 1.5 billion shekels [$430 million]. These investments created thousands of jobs in Israel. The group plans to continue investing in Israel and recently named the former CEO of [the bond rating company] Midroog to manage his investments in Israel.”

Others active in the online gambling industry also took advantage of the changes. Born in the United States and the founder of PartyGaming, Parasol enjoyed a net worth estimated in 2017 at $1 billion. She lived in a Herzilya Pituah villa, but a source who knows her said she left Israel five years after arriving.

No connection

Shani, who recently sold the high-tech company ECI Telecom, returned to Israel in 2009 after the tax changes were implemented. His spokesman said he left the country four years ago in order to better manage his global business interests and because of any law.

Shaul ShaniCredit: Sivan Farag

Israel passed a law in 2003 creating a new tax regime imposed on a personal basis, meaning that taxpayers are liable for tax on income no matter where it is generated, after taking into account tax paid in other countries to avoid double taxation.

New immigrants and returning Israelis enjoyed a five-year tax holiday on foreign-earned income and a 10-year exemption on capital gains tax, but they still had to report their income to the authorities. In 2008, the law was amended dramatically (Amendment 168) to expand the exemption to 10 years and no longer require reporting during that time, retroactive to the start of 2007.

The law basically let money move under the radar so that today Israel has no information, for instance, on how many people immigrated or returned to Israel because of the changes, whether they invested capital or whether they created jobs – or how much tax revenue the state was deprived of.

The law drew criticism that Israel had let itself become a tax haven, contradicting Israel’s commitment to tax transparency and the exchange of information with other countries. There have even been fears that Israel has been attracting illicit funds.

In addition, the law has encouraged creative tax planning designed to show that income was earned outside of Israel and because that income isn’t subject to a reporting requirement, the tax authorities know nothing about it. Thus Kobi Maimon, one of Israel’s wealthiest businesspeople, who left Israel in 2010, can return next year and enjoy benefits under the law.

Kobi MaimonCredit: Moti Kimche

In the years since the law was approved, the tax authority has tried three times to rescind the reporting-requirement exemption through the Budget Arrangements Law. It is expected to try again in next year’s law.

Officials consider the reporting exemption the most problematic aspect of the overall law because it gives carte blanche to bring capital into Israel unsupervised.

Eran Yaacov, the tax authority director, has backed legislation that would reduce the exemption to just five years if a new immigrant or returning Israeli leaves the country after 10 years. In other words, he or she would be retroactively liable for five years of back taxes. However, the absence of a new government has put the initiative on hold.

Even when a new government is formed, the move is expected to encounter strong opposition from agencies including the Immigrant Absorption Ministry.

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