New immigrants and returning residents are entitled, by law, to a tax exemption on income originating outside of Israel for a period of ten years after they become Israeli residents. At issue is a broad exemption that includes, inter alia, income from capital gains, dividends, interest and royalties generated or accrued outside of Israel. The purpose of this exemption is to provide peace of mind to new immigrants and returning residents by facilitating their financial acclimation.
In particular instances, we recommend applying for a tax ruling from the Israel Tax Authority (ITA), especially when the date of receipt of new immigrant status differs from the date of the actual relocation of center of life to Israel (which is deemed the start date of tax residency). For example: a person who receives new immigrant status but does not actually permanently relocate to Israel until months or years later.
Why is it important to apply for a tax ruling when the date of receipt of new immigrant/returning resident status differs from the actual relocation date?
There are several reasons why applying for a tax ruling from the ITA is essential:
- to avoid the situation whereby banks deduct tax at source from foreign income: banks in Israel are obligated to deduct tax at source from income from abroad, such as from income from foreign securities held through the bank; a tax ruling will enable you to avoid tax deduction and save unnecessary costs;
- to obtain a residency certificate from the ITA: a tax ruling is used as a basis for obtaining a residency certificate from the ITA, which may reduce or eliminate taxation in other countries, such as in respect of income from interest, dividends or capital gains originating abroad, etc.;
- to determine the start date of the tax exemption: a tax ruling provides certainty about the start date of tax residency in Israel, which is used to start the count of the 10-year tax exemption (postponing the start date of tax residency – if justified – might extend the period of tax benefits);
- to obtain legal certainty and avoid future disputes: a tax ruling provides certainty about your tax liability and residency status, prevents future disputes with tax authorities about the start date of the tax exemption and helps you avoid disputes that might arise years later.
When should I apply for a tax ruling?
We recommend submitting an application for a tax ruling as close as possible to the date you relocate your center of life to Israel. Besides the headache of searching for documents to substantiate your claim of tax residency as the years go by (requisite documents during the process of receiving a tax ruling), the ITA might reject an application for a tax ruling merely because it was submitted more than a year after the date of return or immigration to Israel.
However, it is not always recommended to apply to the ITA for a tax ruling. Sometimes, there are better alternatives for proving date of residency, depending upon the specific circumstances.
In conclusion: A tax ruling is a key tool for securing rights and requires professional guidance.
Israel offers significant tax benefits to new immigrants and returning residents, but making the best use of them requires attention to detail, building an optimal tax structure and guidance from professionals who are expert in handling the residency process, whether vis-à-vis the ITA or any other authority. Applying for tax rulings in appropriate instances is an important tool for ensuring that you exercise your rights and avoid future disputes.
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Adv. Andrey Yanai is a partner in our firm’s regulations department.
Adv. Harel Perlmutter is a partner and heads our firm’s tax department.
The legal team in Barnea Jaffa Lande’s tax department has extensive experience providing optimal tax planning tailored to the unique needs of each client. The department provides comprehensive legal advice on all tax aspects pertaining to commercial activities in Israel and international transactions, including strategic planning and creating optimal tax structures, as well as on the tax implications when senior officers of international organizations relocate to and from Israel, etc.