Israel’s much vaunted ten-year tax holiday for new residents is viewed by some as the best thing since sliced bread. To me, it is analogous to shopping for food.

My local Jerusalem pint-sized supermarket is no place for the uninitiated, and not much of a place for the initiated. Prices are high at this emporium of digestible delights, so having ventured past the sliding doors, I try to focus on the deals: two for the price of one, twenty percent off, or second item half price. Egged on by the enticing offers for things I need, I am drawn inescapably to the offers for things I don’t need, and then the things I really need but had promised myself before entering I would buy for half the price at the non-pint-sized supermarket a mile away. After checking my bill, and making the usual enquiries, I discover that I have bought two for the price of two of something I only needed one of, one at the full price I would NEVER have paid, and a second item at full price, having not even wanted the first one to start with. Wrong sizes, wrong bar codes, wrong credit card – I forgot the small print and I only have myself to blame. As a passing Roman Centurion might have said as he poked his head through the sliding doors two millennia ago, ‘Caveat emptor – let the buyer beware’.

Which brings me to the tax holiday. Venture over the country’s threshold, and the picture is tempting. For a whole decade, income and capital gains from foreign sources, even if received in Israel, will be entirely exempt from tax. Combine that with establishing-non residence in the UK and – for good measure – taking assets offshore, and there could be bright round zeros ringing up on the tax authorities’ tills.  The deal of the century – all for the price of nothing – with no strings attached. Could it be there is no small print? There is always small print.

The exemption is, indeed, a major sweetener for many immigrants, but it has a few sour ingredients. In the affordable air travel environment we became accustomed to before COVID, coupled with an increasing acceptability of remote working (accelerated by the virus), many immigrants have retained their jobs abroad, splitting their time between  two or more countries,  spending their working days  in Israel hunched over their computers.

So, with all their income sourced abroad, they should be totally exempt from tax in Israel, no?

No. As they labour at their keyboards, these individuals are, in fact, accruing Israel source income which is taxable even to those just off the boat. The tax authority has a simple way of allocating income between Israel and abroad in such circumstances, by basically splitting the number of workdays in Israel and overseas for the calendar year. Not generally over-endowed with the milk of human kindness, the tax people proceed to interpret a day in Israel as including passing through passport control at one minute the wrong side of midnight. What is more, if a person is abroad for less than a certain number of days in the year, they may as well not have bothered, because the tax authority will not allow a deduction of those days for tax purposes. The day count is based on tax authority interpretation, and there is room for taking a different view on how the split is done; it is even possible, in very specific circumstances, to argue for complete exemption, but in the case of a tax audit an uphill struggle is guaranteed. Indeed, an Israeli  who returned from the UK (a ten year sojourn abroad gave him similar benefits) recently had his day in the high court trying to convince the judges that a piece of small print that wasn’t expunged when the law was last changed in 2008 allowed him to claim that his salary in Israel was in payment for an asset he had created (better sales procedures) while in the UK, and was hence exempt from tax. He got nowhere.

When the authorities have finished roasting the employees, they might start on the foreign employers, who may have inadvertently established a taxable branch in the spare bedroom-come-office of their Israeli employee, while innocently bashing away at their laptop.

As opposed to the supermarket, though, the small print is not all bad. While most Israelis operating through foreign companies owned by them must take account of the risk of that company being considered Israeli resident on the basis of its management and control  – thus exposing the company’s entire income to tax in Israel – statute gags the tax authority against even raising the issue with new residents. In addition, investment in shares of an Israeli company before immigration extends the ten-year capital gains tax exemption to sale of those shares, even though they are Israeli source income. Furthermore, at the end of the ten-year exemption period, the benefit for capital gains on assets purchased before the end of the exemption period tapers off, rather than disappears completely.

The provisions discussed were legislated in 2008, coming into effect retroactively from 2007. After a lot of rumblings, in 2013 the G7 group of leading world economies, together with the Paris based Organization for Economic Cooperation and Development (of which Israel has been a member since 2010), declared all-out war on the vagaries of the international taxation system. Though not alone, Israel’s current system of tax exemption, alongside complete non-disclosure of foreign financial information, is frowned upon. The tax authorities, never slow to smell an opportunity, have been considering a reform of the system internally for some time. It is very possible that a proposal for change will be bought before the new Knesset sometime this year.

It is too early to predict adjustments to the law with any certainty, but when there was recent change of management at my local supermarket, the deals were switched and the small print became smaller. Caveat emptor.

Published in London’s Jewish Tribune, March 24th 2021

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