Yoad Frenkel
Senior Partner
In a word, No. The Knesset has just passed an amendment which lessen but not remove the 10 year tax holiday for foreign income of new residents and senior returning residents who lived abroad at least 10 years (“Olim”) (Income Tax Ordinance amendment 272, published April 7, 2023). What can we expect?
What has just been passed?
Olim generally are exempt from Israeli tax for ten years on foreign income and gains. Until now, exempt income hasn’t been reportable to the Israeli tax authority. Under the amendment, exempt income will remain exempt for 10 years but become reportable by Olim and their bank to the Israeli Tax Authority (ITA). The ITA may then forward that information to foreign tax authorities pursuant to any applicable tax treaty. These new rules should only apply to: (1) foreign income of Olim taking up Israeli residence on or after January 1, 2026, and (2) Income and parties to trusts regarding 2025 and later years, the first report being due March 31, 2026. Just for good measure, the ITA will be allowed to demand reports from foreign companies (onshore or offshore) controlled and managed in Israel by such Olim.
Why is this happening?
Explanatory comments to the draft bill revealed that the Aliya reporting exemption does not meet OECD and FATF recommendations for governments to be fully informed about entities and arrangements. These are intended “to help prevent the organized criminal gangs, the corrupt and sanctions evaders from using anonymous shell companies and other businesses to hide their dirty money and illicit activities.”
What’s the issue with Israel?
The Knesset Finance Committee reviewed the bill. There was a big rush to pass the amendment in order to avoid Israel being blacklisted by the OECD global forum on transparency and exchange of information for tax purposes.
Why? Because in Israel, Olim in positions of control currently escape recording, information exchange legislation is lacking and information exchange procedures are considered poor.
If the OECD global forum were to blacklist Israel, the EU and others would follow suit. Even the UK has just announced it is limiting its “non domiciled” tax breaks to 4 years.
Mr. Shmuel Abramson, the Chief Economist at the Finance Ministry warned that this is an unprecedented event for Israel. No developed Western country is blacklisted. If you enter the blacklist, you are a player that no one wants to play with. There would be an impact on foreign investments…the total at stake may amount to billions of shekels.
In the end, the above amendment was duly passed and published on April 7, the deadline day specified by the OECD global forum.
What is proposed in Israel?
Briefly, the bill proposes to repeal the exemption from disclosing foreign source income and gains of new residents, senior returning residents (who
resided abroad over 10 years) – i.e. Olim and others – and various types of trusts in which they are parties. Trustees will need to file forms with the
Israeli Tax Authority (ITA) spelling out exempt income. Where parties to a trust include entities and arrangements (as opposed to individuals), their
ultimate beneficial owners (UBOs) will need to be disclosed. The definition of UBO will be taken from anti money laundering rules. This includes
individuals who steer activities in practice i.e. “call the shots”.
Companies abroad controlled and managed by Olim should start keeping accounts according to Israeli generally accepted accounting principles.
If enacted the disclosure rules would apply to individuals who move to Israel on or after June 1, 2025, but to trustees only 90 days after publication of
enactment of the law and to income tax returns for 2024 onwards.
Possible implications:
What will the ITA do with all the new information reported by Olim starting in 2026? They will read it, of course, and use it. The average Israel tax official won’t say: “I can forward this information to another country’s tax authority?” He will say “Let’s see how I can first assess some Israeli tax”.
So we expect the greater transparency in 2026 will highlight existing Israeli tax issues for Olim.
Here’s a few possibilities to consider:
- Will the Israeli government follow up with a proposal to eliminate the Aliya 10 year tax exemption or reduce it to 4 years like the UK?
- With more facts at their fingertips the ITA may review the dividing line between Israeli and foreign activities and active versus passive activities. The resulting tax due may fluctuate.
- Timing matters. When to migrate? When to sell up?
- Will foreign trustees feel bound to report things to the ITA? Or will they pick up business in lieu of Israeli trustees?
- When did a person’s Israeli fiscal residency (center of living) really begin? What about a long vacation in Israel? A legal Opinion from an Israeli tax lawyer may help. Alternatively, a factual/mathematical analysis by an accountant may help.
- If an Oleh owns a foreign company, does he exercise control and management, making the company potentially resident and taxable on worldwide income? Or does he trigger a taxable branch in Israel? Who calls the shots? Careful structuring is vital.
- Does a transfer pricing study clarify things in your favor?
- What about e-commerce from an armchair in Israel? Who taxes you?
- What about stock options held by Olim? Many issues arise.
- Israeli banks scrutinize all money remitted to Israel, which can be challenging….
- Etc.
As always, consult experienced tax and legal advisors in each country at an early stage in specific cases.
Leon Harris and Yoad Frenkel
Yoad Frenkel at the the Finance Committee – discussion to cancel the exemption from reporting of new immigrants: