Deal of the decade

  • Author : Meir Linzen
  • Author : Guy Katz
  • Date : December 2012
ABOUT THE AUTHORS: Meir Linzen TEP is Managing Partner and Head of the Tax Department of Herzog Fox and Neeman, and Chair of STEP Israel. Guy Katz TEP is a Tax Partner at Herzog Fox and Neeman

The State of Israel introduced, effective as of 1 January 2007, a special tax regime that applies to new immigrants (Ole Hadash) and former Israeli residents who returned to Israel after more than ten years (long-term returning residents). The main goals of this tax regime were to encourage immigration of wealthy families to Israel and to provide new immigrants with a period during which they will be able to arrange their tax structures and adapt them to the Israeli tax system. Although no formal data was published about the number of new immigrants who arrived in Israel as a result of the legislation, it appears that the legislation has been a great success, and many wealthy families have immigrated to Israel and based their home and businesses in the country.

Below we outline the main benefits provided to new immigrants and returning long-term residents.

Full exemption on foreign-sourced income

New immigrants are tax exempt in Israel for ten years on their foreign- sourced income, including passive income and earned income (such as employment and business income), unless they have requested otherwise.

In addition, new immigrants are exempt from capital gains tax on the sale of foreign assets, provided the sale is made within ten years of the date of their immigration to Israel. Where such an asset is sold more than ten years after the change of residence, the capital gain is apportioned on a linear basis, and only the gain attributable to the period after the expiration of the ten-year exemption period is taxable.

The foreign-sourced income does not have to be derived from assets that the new immigrant held before immigration to Israel. However, these exemptions do not apply to assets (both tangible and intangible assets, except for cash) that were received after 1 January 2007 as a gift that was tax-exempt under s97(a)(5) of the Israeli Income Tax Ordinance. According to the s97(a)(5), a capital gain that arises on certain gifts to Israeli relatives or to other Israeli individuals is tax-exempt.

Management and control of foreign companies

The residence of a company under Israeli tax law is determined, inter alia, by the management and control test. For ten years after immigration, foreign companies held by new immigrants will not be considered as managed and controlled from Israel merely because of the immigration of their owner to Israel.

Controlled foreign company (CFC)

As a general rule, according to the Israeli CFC legislation, the passive income of a foreign company should be allocated, in certain circumstances, to its Israeli shareholders as if being distributed as a dividend. New immigrants will not be considered Israeli residents in respect of the CFC legislation for ten years from the time they became Israeli residents.

Foreign occupation company (FOC)

Certain foreign companies that are used by Israeli residents to provide services outside Israel are considered, in certain circumstances, to be FOCs. The part of an FOC’s income that is derived from services that are provided by Israeli residents is subject to tax in Israel. New immigrants will not be considered as Israeli residents for the determination of a company’s status as an FOC or for the taxation of the FOC’s income in Israel.

“New immigrants are tax exempt for ten years on their foreign-sourced income”

Foreign allowances that are being paid to new immigrants for their employment outside Israel are tax-exempt for ten years. After this, the tax that applies to this income is limited to the amount of tax that the new immigrant would have paid on the allowance in the foreign country that pays the allowance, if they had remained a resident of that foreign country.

Relief from reporting obligation

New immigrants are not required to file reports with the Israel Tax Authority (ITA) on their foreign income or assets for ten years from the time they became Israeli residents. This exemption refers to both annual tax returns and capital declarations.

In addition, for ten years, new immigrants who are foreign settlors of a trust, as well as the trustee of such a trust, will not have to file tax returns on the trust’s foreign income or submit a notice to the ITA about changes in the status of the trust, as a result of the settlor becoming an Israeli resident.

The exemption shall not apply to assets that the new immigrant has requested not to be exempted, or to assets that the new immigrant received as an exempted gift from another Israeli resident.

A new immigrant who has Israeli income (even if it is exempted) in an amount that exceeds the applicable amount will not be exempt from filing an annual return. The applicable amount depends on the type of income.

Acclimatisation period

A new immigrant is entitled to elect, within 90 days of arriving in Israel, not to be considered as an Israeli resident for one year following their arrival in Israel (the acclimatisation period). The election form is formally submitted to the Ministry of Immigrant Absorption (although it may be transferred to the ITA by the Ministry of Immigrant Absorption), and the ITA is not expected to respond to this form.

Where the new immigrant decides to become an Israeli resident, the period for the tax benefits will include the acclimatisation period (i.e. the acclimatisation period does not extend the exemption period to 11 years).

Foreign currency deposits in Israeli banks

Pursuant to a specific order issued by the ITA, interest received by a new immigrant in respect of a foreign currency deposit in a special kind of Israeli bank account is exempt from tax for 20 years following their immigration.

However, to be entitled to this exemption, the following conditions must be met:

  • the new immigrant must deposit into the account only money that they owned outside Israel before their immigration to Israel
  • the new immigrant must deposit the money in the account within 90 days from the date on which the money was transferred to Israel
  • the new immigrant must make certain declarations and file certain forms
  • the interest income must not be derived from a trade or business; and
  • the deposit must not serve as a guarantee for a loan that the Israeli bank extended to the new immigrant’s relative or to a corporation that they own.

Long-absent returning residents are entitled to similar exemptions, but only for five years.

Taxation of gifts and inheritance

Israel does not impose gift and estate taxes, except on gifts to foreign residents. In this event, the gift is treated as a sale of the gifted asset, based on its fair market value, and is subject to capital gain tax.


The Israeli tax regime provides a unique opportunity for high-net-worth individuals to be tax residents in Israel, a country that is a member of the OECD, while being exempt from tax and reporting on foreign-sourced income for ten years.

Due to this wide exemption, the required tax planning before immigration to Israel is usually minimal. However, it is still recommended that new immigrants examine whether any specific planning is required before immigrating to Israel. Such planning may include a creation of a trust that can preserve the ten-year exemption for their heirs if the new immigrant dies. In addition, in certain cases where the new immigrant holds Israeli assets or expects to purchase such assets, special planning is required, since such assets are usually subject to tax by new immigrants, and it is important to ensure that such taxes will be minimal.


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