By: Yoad Frenkel, Adv. & C.P.A. (Israel) - Ziv Sharon & Co. Law Office
As is well known, in the past two and a half years, taxpayers who have been classified as "first-time Israeli resident" or as "veteran returning residents" (hereinafter: "beneficiary individuals") have completed their ten years of tax holiday in accordance with Section 14 of the Income Tax Ordinance (New Version), 5721-1961 (Hereinafter: "The Ordinance").
Amendment 168 of the Ordinance was passed in second and third readings in the Knesset in September 2008 and applies retroactively to those who immigrated or returned to Israel from 1/1/2007 onwards. The purposes of the amendment, which were mentioned in the bill were: (1) immigrant absorption. (2) The return of quality human capital to the State of Israel. (3) Encouraging investors with high economic ability to become residents of Israel. These purposes are important in the interpretation of the benefits granted to beneficiary individuals.
The definition of a "person who has been a resident of Israel for the first time" places an emphasis on a person who was not an Israeli resident earlier, whereas the definition of "veteran returning resident" emphasizes that prior to his return the person spent ten consecutive years abroad (until December 31, 2009, a temporary order provided that five consecutive years of stay abroad before the return were sufficient). These definitions, based on the definition of "resident of Israel", are not definitions whose implementation is always clear (see the last judgments in the John Doe case, Amishkashili and Bar Refaeli). In other words, there is a risk that with respect to beneficiary individuals, if the Tax Authority examines their compliance with the definition even after the ten years elapse, the ITA will be able to retroactively revoke the benefits. In our opinion, insofar as we are concerned with beneficiary individuals who submitted tax returns due to the existence of business in Israel or other grounds enumerated in the Income Tax Regulations (Exemption from Accountability), 5748-1988, as most of the reports of the benefit period have the ITA cannot tax the foreign sourced income in these years.
As is well known, beneficiary individuals are tax exempted on their foreign sourced income in accordance with section 14 of the Ordinance as well as tax exempt with respect to capital gains from foreign sourced assets, whether purchased before or after (within the ten year tax holiday)...