It is the morning of the Maths exam that will decide which, if any, university awaits the candidate. He/she suddenly realizes that he/she hasn’t even started learning the syllabus.
How many of us have periodically woken in a cold sweat from that nightmare in the course of our adult lives?
I sometimes feel that, especially around the December full moon, tax advisers do their darnedest to induce such feelings in the populace with ‘Achtung!’ articles of what must be done (but clearly can’t be achieved) before drawbridges go up for the Christmas/New Year break.
I only ever tried to panic a prospective client once. (I warned a foreign company that they needed to get their VAT house in order to avoid risk of criminal prosecution, they ignored me and went to an alternative firm that proffered soothing advice, and they were criminally prosecuted two years later).
So, allow me to preface my remarks on Israel’s 10 year tax exemption period for first-time and certain returning residents by stressing that they are not aimed at those whose benefits end in the next few weeks, but rather in 2019 and thereafter. People who arrived on their equivalent of the Mayflower in 2008 (or earlier) are either sorted out, or the best of luck.
Everybody – that is the entire Jewish world, the OECD and the IMF – by now knows that Israel has operated a territorial tax system for first-time and certain returning residents since 2008 (with retroactive force to 2007). The law states that a first-time resident or veteran returning resident is exempt for ten years from income produced or derived outside Israel or whose source is in assets outside of Israel, as well as capital gains from the sale of such assets. The problem is that (from my experience) many mistakenly believe that, as long as they don’t go to work on a kibbutz milking cows, they can forget about tax for ten years. In reality, even those who do not incur any Israeli taxation during the exemption period need to be prepared for the day at the end of the decade when they fall off the tax cliff.
First of all the good news. Despite the drafting of the law being as hopeless as much other tax legislation in the country, more than ten years down the road the tax authorities seem to have made their peace with much of the excruciatingly inconsistent language, as well as the fundamentals of residence. Grammatical glitches appear to have been passed over unnoticed, and nobody seems to be bothered about the repeated careless use of the word ‘Oleh’ in pronouncements, aliyah not being a prerequisite for tax residence. 2018 saw the first annual filings of residents coming out of the ten years (for the 2017 tax year), and most of the reporting snafus will presumably be ironed out over the coming months. Similarly, some of the more heroic assumptions required as the assessee slowly glides out of the exemption period (there are special provisions for capital gains) can be expected to be blessed, or otherwise, by the authorities.
As people start to report, the authorities could take an interest in the exemption period, looking for amounts that should have been reported despite the exemption.
In any event, among the issues assessees need to be considering as the watershed approaches are:
- When did they actually become resident? Although, in terms of the wording of the law, residence under domestic law as opposed to treaty is an annual thing, the authorities have repeatedly made clear in writing that they interpret it as something that can change mid-year. So far, so good. The problem is that their pronouncements on when the ten years actually starts have made clear it is not necessarily the night they give you a funny hat and a flag at Ben Gurion airport if, for example, there was already a home in Israel and/or significant time has been spent in Israel.
- Are they sure none of their income was ‘produced or derived’ in Israel, and thus liable to tax? There have been rulings over the last decade concerning new residents working with foreign companies from Israel ‘by remote control’ through internet, e-mail etc, or trading foreign securities from Israel. The tax authorities are operating an amnesty procedure until the end of next year – although if an anonymous request is desired, it has to be made by the end of this month (ouch!).
- Corporate structures abroad, while being convenient as long as Israeli taxation does not apply, may need reorganizing. That is something that generally needs to be done while the exemption is still in place.
- Decisions need to be made regarding whether to realize assets – significantly parts of securities portfolios – before the end of the exemption period, or to benefit from the only gradual linear increase in capital gains in the post-exemption period.
- Thanks to developing legislation since 2006, trusts are supposed to be largely tax neutral – but there are still some horrible jagged edges that can create nasty tax accidents . There are certain benefits to new-resident settlors or beneficiaries that soothe the pain as long as the exemption period lasts. The long-term future of such trusts needs to be considered.
I sincerely hope this hasn’t scared anybody. I prefer to think of it as a Public Service Announcement. Really.