Your Taxes: Mulling a return to Israel? Here's what you need to know

Many Israelis who left to live abroad are starting to return to Israel. Some went abroad because of the war, while others relocated abroad in the hi-tech sector. They are coming back for family reasons or because of antisemitism abroad.

A rebuttable presumption of Israeli residency will apply if: (1) the individual is present in Israel at least 183 days in a tax year ending December 31; or (2) the individual is present in Israel at least 30 days in the current tax year and 425 days cumulative in the current and two preceding tax years, i.e., 142 days per year on average. Days of arrival and departure count as complete days, not partial days.

The main tax benefit for a “senior returning resident” – who resided abroad more than 10 years – is a 10-year “tax holiday,” i.e., exemption from Israeli tax on foreign-source income and gains arising after the return.

All this assumes the individual was fiscally resident in another country; being resident nowhere is not enough, e.g., Bar Refaeli case.

But what happens if an individual was away for less than 10 years before returning to Israel? If the individual was away at least six consecutive years, a different, more limited, but still useful, tax break is possible. Such an individual is known as a “returning resident,” not a senior one.

A returning resident may enjoy an exemption for six years on nonbusiness income accrued or derived abroad from pensions, royalties, rental income, interest and dividends derived from assets that the returning resident acquired abroad after leaving Israel.

The six-year exemption also applies to income from interest and dividends derived from “privileged securities.” Privileged securities are securities publicly traded on a foreign stock exchange that the returning resident acquired abroad after leaving Israel and are held in an account at a banking institution OR acquired out of interest or dividends from privileged securities that were deposited in that account.

Capital gains: Regarding capital gains, a returning resident who was away from Israel for six years may enjoy a 10-year exemption (instead of six years) on the sale of assets purchased abroad while resident abroad so long as the assets do not relate to assets in Israel.

The 10 years begin when the individual becomes an Israeli resident. The 10-year exemption can apply to any such foreign asset, e.g., real estate, and not only privileged securities.

If such assets are sold more than 10 years after resuming Israeli fiscal residence, a pro rata exemption is available. The exempt amount is: inflation-adjusted gain times the period owned up to the end of the 10-year exemption divided by the total period owned

The individual should keep all bank documentation showing that all foreign privileged securities were acquired after leaving Israel.

Nothing can be deposited in the above securities  account after the individual becomes a returning resident, except for interest, dividends, or capital gains from privileged securities

Another possible side benefit of moving back to Israel relates to the exit tax. This is really capital-gains tax of up to 35% payable when the individual first left Israel.

If an individual stops being fiscally resident in Israel, they are deemed to have sold their assets at market value. The exit tax is due one day before leaving Israel, but the tax liability may be postponed to when the leaver actually sells assets. So, an individual may effectively avoid any unpaid exit tax by resuming Israeli residency.

As always, consult experienced professional advisers in each country concerned at an early stage in specific cases.