Income of new repatriates from abroad: what falls under the tax benefits, and what does not?
- In regard of which foreign and Israeli income does a new immigrant have tax benefits?
- What foreign income is not covered by tax benefits for new immigrants?
- How a new resident of Israel should account for the earned income from abroad?
- How does a citizen of Israel pay taxes upon expiry of 10 years after aliyah?
First, I want to note that the tax benefits available to new repatriates (“ole hadash”) allow to save a lot of money, and sometimes not to pay income tax in the first years of life in Israel. Such a mechanism is envisaged by the state in order to help “Ole Hadash” to quickly settle down and adjust to new conditions. And if, for example, a person who plans to repatriate to Israel has a business in the country of origin or assets that he does not intend to sell, or a job that he can do remotely, then he can also count upon special tax benefits for an extended period of time.
On the website of the Ministry of Aliya and Absorption it is possible to familiarize with such a general list of tax benefits for new repatriates:
- During 3.5 years, the repatriate has the opportunity to reduce the amount of income tax, levied on wages and salary using the system of preferential units (Nekudot Zikuy). In 2018, the amount of the tax relief for one preferential unit (nekudot zikuy) is NIS 216 per month or NIS 2592 per year.
How it works:
- In the first 18 months of living in Israel as a new citizen, the repatriate has benefits of 3 Nekudot Zikuy or 648 Shekels per month for the amount of income tax;
- In the next 12 months – 2 Nekudot Zikuy or 432 shekels per month;
- For another 12 months – 1 Nekudot Zikuy, 216 shekels per month.
- The grace period begins from the date of obtaining the status of the repatriate, and not from the “first income”. If there is no initial income for the new citizen of Israel, then this benefit cannot be postponed, for example, until employment.
- If the calculated tax is less than the amount due, the difference simply “burns up”, i.e. Nekudot Zikuy may fully cover the amount of income tax, but do not create additional repayment supplements “for non-use.”
- For 10 years, the repatriate does not pay taxes and does not report to the “Mas Akhnasa” as regards the income tax on such income from abroad as bank deposits, dividends from securities, rent, retirement pension, royalties, profit from sales of real estate or assets, etc.
- If you are a new repatriate and plan to sell your property abroad, for example, an apartment in the country of origin, then it is better to do this before the expiry of the grace period of 10 years.
- If in this list you “did not see” your income, consult with an expert.
- For 10 years the repatriate does not pay tax on pension savings.
- For 20 years, the repatriate does not pay income tax on profit from foreign currency savings, provided that this money came with the “Ole Hadash” from the country of origin and is kept in the banks of Israel.
- Also exempt from taxes is the income obtained abroad from a foreign business or investment projects of the repatriate. The business or investment projects must be created before repatriation.
If you are a new repatriate who permanently resides in Israel but works remotely for a foreign employer, then such income from abroad does not fall under any of the items of the preferential system described above. Here, other principles of taxation and other benefits will apply.
Usually, the taxation of such income is governed by regulatory documents that cover the issues of double taxation and prevention of tax evasion. And usually such documents establish that if the work for a foreign employer is carried out in the country of residence, then such income is taxed according to the tax legislation of the country of residence.
1) If you are an Israeli citizen who works for a foreign employer as a staff member, you need to make sure that the accounting department of your foreign employer does not deduct local taxes from your salary, but applies to you the principles of calculating salary for a foreign employee.
2) If you are an Israeli citizen who works for a foreign employer on the terms of a civil contract, make sure that your contract contains an item stating that the work is carried out outside the territory of the employer’s country. Such a provision will ensure the tax jurisdiction of the country of residence, i.e. Israel.
Also taxable in the country of residence is the income from “international” professional activity. This applies to writers, artists, architects, scientists, teachers, etc. An exception may be situations where an artist or an architect (or any other person engaged in professional activities) has personal accounts in the “customer country”, into which the income is received, or a legal entity or some other “local base”. Tax advisors in the “customer country” and in Israel will help to clarify this point.
N.B.: If the work is physically done in the “customer country” and paid there, then such work is taxed first according to the tax legislation of the “customer country”, and then in the country of residence. That is, for new repatriates such income is taxed only in the “customer country”, and in Israel it is exempt from taxation for 10 years. Upon the expiration of the “ole hadash” grace period, international regulatory documents governing double taxation come into force.
Some new compatriots do not at all hasten to declare such incomes, and as an experienced tax expert I can say with certainty that the Israeli tax authorities are vigilant for the money due, evaders are figured out sooner or later (but usually sooner), then punished severely and without leniency (“I didn’t know” is not an argument for them).
More often than not, we recommend that a new repatriate should register as an individual entrepreneur – this may be an “esek patur” or an “esek murshe“, depending on the type of activity and annual turnover. And to collaborate with foreign employers on the basis of a civil contract. Business activities of an “ole hadash” also enjoy a number of tax incentives.
Yet I do not dare to offer an exhaustive and universal answer to the question of how it is better for the resident of Israel to account for the labor incomes from abroad. The taxation of the income of a physical person or a private entrepreneur is affected by many factors, such as types of income and amounts (meaning, in relation to the minimum income), whether the payroll is calculated by an Israeli employer, whether the income comes from business activities in Israel, also by what expenditures are incurred by the taxpayer and many other factors. In each specific situation, it is better to seek tax advice and work out the best reporting format.
N.B.: Here I want to remind you that according to the professional code, the interpersonal communication between the client and the rohe heshbon is completely confidential.
The income of an Israeli citizen from labor relations with foreign companies is subject to taxation on general grounds:
- If work is physically carried out from Israel, then under the tax laws of Israel;
- If an Israeli citizen leaves to do the work, for example, for Russia and receives his salary there, he pays Russian taxes first, and then pays a difference in Israel, if the Israeli tax rate is higher than Russian. Usually it is higher.