Israel Advances Tax Relief for Returnees and Immigrants in High-tech

Government-backed benefit package meant to entice returning Israelis who have lived abroad between one and five years

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High-tech park in Ra'anana.
High-tech park in Ra'anana. Credit: Tomer Appelbaum

Several Israeli government ministries are working on a benefit package for returning Israelis and new immigrants, in a fresh bid to ease the labor crunch in the local high-tech industry.

The plan, which includes significant tax benefits, is set to last two years as an emergency order. Once the details are worked out, it will require legislation before it can go into effect. 

A major component of the proposal, led by Finance Minister Avigdor Lieberman and Science and Technology Minister Orit Farkash-Hacohen, is meant to encourage Israelis who left over a year ago to return. Currently, only Israelis returning after five years are eligible for limited-time tax exemptions on income from abroad. The new proposal would shorten that period to one year, on condition that the individual works in high-tech. In contrast to the existing law, however, the returnee would still be required to report that income.

Regarding returning workers after one year based on the emergency order, the Israel Tax Authority will confirm the date when they ceased to be residents, so that it won’t be able to claim they remained residents for tax purposes (during the relatively short period in which they resided abroad). Thus, it won’t be able to demand they pay taxes on income they had abroad. The initiative includes recognizing moving expenses for the return to Israel. It has been proposed to establish a mechanism for deducting moving expenses and adjustment costs during the first two years, to a limit to be determined later.

The second part of the proposal includes tax breaks for anyone eligible to immigrate to Israel under the Law of Return. Immigrants won’t have to pay more than 30 percent income tax (compared to the maximum of 47 percent) during the first year after returning and 35 percent during the second year. After two years, returnees will be able to choose to be permanent residents or to return to their country of origin. Should they leave Israel, they won’t be considered an Israeli resident during their stay in the country, thus giving them up to two years to adjust to living in Israel compared to the current limit of one year.

Science and Technology Minister Orit Farkash-Hacohen.Credit: Eyal Toueg

All these benefits will be conditional on the Innovation Authority reviewing the contribution and integration of returnees and immigrants in the high-tech industry and approving each individual’s eligibility. The benefits in general will be given for a minimum work period that will be set by law. The proposed benefits will be in place of the tax benefits currently given to immigrants and returning residents according to the choice of the returnee or immigrant.

Immigrants replacing Arabs and Haredim?

High tech in Israel suffers from a severe labor shortage, which got worst this past year as the technology industry blossomed worldwide. Investors put over $20 billion into Israeli tech companies in 2021, twice the amount invested last year, which had also set a record. Most of the money is meant for hiring personnel, a critical component to growth. The shortage, along with the rise in salaries, forces companies to open offices abroad or makes it harder for them to expand quickly.

The shortages are across the board, from development to sales and marketing, particularly experienced workers. Executives needed to establish teams are also in short supply. Thus, for example, if a company hires a CFO in the United States, one can assume the company’s financial department will be established near that executive.

Minister Farkash-Hacohen has already announced a plan intended to encourage high-tech companies to take advantage of the permits meant for non-Israeli experts so that they will be able to hire in Israel workers from abroad, and to encourage technology professionals to immigrate under the Law of Return. The planned tax benefits go hand-in-hand with this plan.

One of the fears is that such plans will harm efforts to integrate underrepresented groups, such as women, Haredim and Arabs, into the high-tech industry in Israel. While returning Israelis – if they worked in high-tech companies abroad – are experienced workers, their return to Israel, and certainly the hiring of new immigrants who aren’t necessarily experienced, could come at the expense of these marginalized groups.

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