After years in which the Israel Tax Authority has been trying to cancel the exemption for new immigrants and returning residents from reporting and tax on foreign income and assets, the OECD has forced Israel to do so.
The Ministry of Finance last week issued an amendment to cancel the exemption from reporting after the OECD warned that Israel would be blacklisted as a country that does not obey international transparency rules and would be exposed to economic sanctions, if it did not stop serving as a tax haven and assisting in hiding assets held in other countries.
Since the reform was first introduced in 2008, Israeli politicians have justified it as bringing a wave of 'Jewish money' into the country and it has proved effective in doing so. In 2009 and 2010 many billionaires flocked into the country including the late Sammy Ofer and his son Eyal, real estate magnate Sol Zakay, tech entrepreneur Arnon Katz and Teddy Sagi.
The reform, which exempts new immigrants from reporting income and assets abroad for 10 years, became known as the Milchan Law, after businessman Arnon Milchan who became one of the main beneficiaries when the exemption from reporting was extended in 2018. It was claimed that Prime Minister Benjamin Netanyahu had worked to extend the exemption especially for Milchan's benefit. The allegations against Netanyahu in the 1000 Case revolve around this claim.
The age of international transparency
Two amendments currently published for tax legislation are designed to bring Israel in line with OECD international policy. The first requires reporting and providing information regarding owners of rights in corporations and trusts (an accepted instrument for intergenerational transfer and protection of property), and the second requires reporting and information on all assets and income worldwide. The main benefit, tax exemption for a decade, is not being canceled.
In the age of international transparency and anti-money laundering regimes that require the disclosure of all sources of money worldwide in order to enter funds into the banking system, it is unlikely that the cancelation of the exemption from reporting will bring about a major change. However, taxation experts explain that there could be economic and other consequences that could complicate the lives of new immigrants and returning Israelis.
Adv. and (CPA) Daniel Paserman, Gornitzky GNY law firm head of tax says that "If the taxpayer is law-abiding, then the amendment means less to them - they have nothing to hide. In addition, reporting obligations required by financial institutions in recent years have been very rigid. Today it is not possible to open a bank account or make financial transfers, without providing details about controlling owners, beneficiaries (UBO), the source of the money, etc. Therefore, the information regarding both first-time residents of Israel and long-time returning residents is in the hands of the banks in Israel and is in fact exposed to the enforcement authorities."
He adds that the major consequences are not in the context of money laundering but with the Israel Tax Authority. "For example, an American or an English person who immigrates to Israel at the age of 55, and has money and assets abroad. If they are required to report, the Tax Authority will ask them for the history of all assets and funds, in order to trace the sources and income, until it is satisfied that there is no taxation in Israel. It can be a tedious and exhausting procedure."
Paserman continues, "From the outset, there has been a desire to avoid this behavior, and to allow the opening of a new page. Now, the amendment will allow the Tax Authority to examine all this information. This will create friction with the Tax Authority and could discourage people from immigrating to Israel." He further adds that "If individuals acted illegally in other countries, the reporting and exchange of information with the foreign authorities could expose them."
To draw water from a rock
Adv. Tal Teri, an international tax expert at Benjamini & Co. law firm says that the timing of the cancelation of the exemption is problematic. "More than once, clients have come to our offices stating that one of the reasons they want to live in Israel is the exemption from tax and reporting, and it is possible that now they will reconsider their steps.
Teri adds that the main concern is that the Israel Tax Authority will use the reporting to increase the tax demands from new immigrants and returning residents. "It seems that under the guise of canceling the exemption from reporting, the Tax Authority can use the information it receives and make claims that it did not make before, which would lead to the cancellation of the tax exemption to which those individuals are entitled. For example, the Tax Authority can claim that a certain taxpayer does not meet the definition of a 'long-term returning resident' and that they are liable for tax on all of their income in Israel, or that certain income was produced in Israel and is therefore taxable in Israel."
Adv. (CPA) Ofir Levy, lead partner in the taxation department at the Arnon Tadmor-Levy law firm and formerly a senior official at the Israel Tax Authority, who was responsible for presenting Israel's position to the OECD 15 years ago on the matter of its exemption policy from reporting for new immigrants, does not get particularly excited by the cancelation of the exemption.
"I don't get the impression that this will cause those who planned to immigrate to Israel to avoid doing so," he says. "But I am very concerned about something else - a new immigrant who will now report to the Tax Authority significant amounts of exempt income from abroad, will most likely be called to a tax hearing where the inspectors may make great efforts to challenge their position, draw water from the rock and charge them as much tax as they can. In the current fiscal situation, the Tax Authority's efforts may go in extreme directions, so much so that there is concern that new immigrants will consider leaving Israel as a result."
Published by Globes, Israel business news - en.globes.co.il - on February 26, 2024.
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