1.

The correction's coming into effect:

The correction's significations will be retroactively applied starting from January 1st, 2007. That is to say that the correction's significations will apply on whoever became an Israeli resident starting from January 1st, 2007 onward, and it will apply on whoever ceased from being an Israeli resident on the aforementioned date onward. Exception to this is the change in the definition of regular returning resident that will be effective starting from January 1st, 2009 (see in the following note 6).

2.

Clause 14 (A) to the income tax order:

According to the existing law, an individual that initially becomes an Israeli resident (herby: "new immigrant") a tax exemption will be given for a 5 years period only on passive revenues (interest, royalties, dividends, pension and rent) for assets purchased abroad, as well as entitlement for tax exemption, for a 4 years period, on business' earnings and as long as the business was active for at least 5 years prior to the time of immigration to Israel.  

The correction determines exemptions to all types of earnings of the new immigrants, produced abroad, for the duration of 10 years from the day of the immigration to Israel, in a manner which will include all the current earnings (business or passive) rather if they were originated from assets owned prior to being a resident or not[1] (for the matter of capital gains see in the following note 4)

It is emphasized that the correction determines a restriction to the aforementioned, stating that if the asset producing the earnings was transferred to the current owner as a tax exempt gift after the day when the law has come into force, meaning January 1st, 2007, then the profits produced from this asset will not be privileged with the tax benefits aforementioned in the correction.

Additionally, the correction determines a new taxing status: "senior returning resident".

The senior returning resident will be granted to individuals returning to Israel, after being a foreign resident continuously for at least 10 years from the date of leaving Israel. This status will broaden the tax benefits given today to regular returning residents and will equalize it to those granted to new immigrants.

Additionally determined in this matter, as a "temporary order", that in the years 2007-2009, the period which will entitle an individual to be considered as a "senior returning resident" will stand on 5 years only if he or she was considered as a foreign resident on December 31st, 2006. In other words, in order to encourage the return of Israelis to Israel, the period for staying abroad, required in the correction for receiving the status of senior returning resident was shortened from 10 years to 5 years.

3.

Clause 14 (B) to the income tax order (year of adaptation):

According to the correction, new immigrants or senior returning residents will be given with an adaptation period of 1 year from the date of his or her arriving to Israel (provided that a notification was given to the tax authorities within 90 days from the date of immigrating / returning to Israel).

An individual that became an Israeli resident starting from January 1st, 2007 onward, could also benefit from the adaptation period of one year, conditioned that a notification will be filed to the tax authorities on his or her wishes to benefit from this period, within 90 days from the date of publishing the correction (September 16th, 2008).  

4.

Clause 97 (B) (Capital gain):

Regarding new immigrant / senior returning resident, the correction entitles an exemption over capital gain derives from an asset for the duration of 10 years, in respect to assets from abroad, rather if those were purchased by the new immigrant / senior returning resident, prior to becoming an Israeli resident and rather if purchased at a later date[2].

Once the 10 years period ends, the exemption will not be cancelled, but rather reduced in a linear manner.

5.

Controlled foreign company:

According to the existing law, Controlled Foreign Company (CFC) is defined, among other criteria, as a foreign resident group of individuals, which no more then 50% of the control means of it are held by an Israeli resident.

The correction determines, that the immigration or returning share holders of controlled companies and / or managed by new immigrants or senior returning residents, does not change these companies status to Israeli resident companies, if they where not classified as such prior to the immigration of its shareholders.

According to the correction, the company will continued to be classified as a foreign resident company for the duration of 10 years from the date of the shareholders immigration, and becoming Israeli residents. Additionally, the correction determined that during those 10 years from the date of immigration of the shareholder his share in the control means of the company will not be considered. In other words, the shareholder of a controlled foreign company that is a new immigrant or a senior returning resident will be considered as a foreign resident, for this matter.

It is emphasized that a company can, if interested, to chose to be considered as an Israeli resident.

6.

Clause 134 (B) and 135 (B) (exemption from reporting obligation over income originated from abroad:

The correction determines that individuals (new immigrants and/or senior returning residents) and the companies controlled by them will not be obligated in reporting their assets and earnings exempt from tax according to this correction. That is, a new immigrant or a senior returning resident will not be obligated in filing a tax report regarding their total earnings and assets from abroad for the duration of 10 years from the date of their immigration or returning to Israel. This is also relevant regarding to capital statements.

7.

Trust statement:

The correction has determined a number of reliefs in giving notice regarding trust statement:

The trust settler, which initially became an Israeli resident or that is a senior returning resident, is not obligated in filing a trust statement for the duration of 10 years since the date of becoming an Israeli resident, and this is conditioned that the trust settler has granted only asset located abroad, or it related to an earning derived from such asset located abroad.

Trust that became an Israeli resident trust, or to an Israeli resident beneficiary trust due to the settler / beneficiary's immigration or returning to Israel, would not be obligated in filing a trust for the duration of 10 years starting from the date of immigration / returning to Israel, and this is conditioned that the asset that was given to the trustee of the trust is located abroad or that the earning derived from the asset is originated from abroad.

Additionally, changing the trust classification to Israeli residents trust, due to the initial becoming of one of the settlers to an Israeli resident or to a senior returning resident, then reporting is not obligated, and all is conditioned that the asset to the trustee is located abroad or / and the earning derives from the asset is originated from abroad.

8.

Additional notes that were corrected:

The classification of a "regular" returning resident has been changed (unlike the "senior" returning resident), where as that individual who stayed for a 3 years period continuously abroad, was considered a returning resident, the duration of this period was changed to a continuance of 6 years. It is emphasized that the extension of the period of staying abroad is relevant only on individuals that will ceased to be an Israeli resident starting from January 1st, 2009.

Regarding the benefits entitled to "regular" returning residents, all benefits stayed unchanged: tax exemption on capital gains for the duration of 10 years starting the date of his or her returning to Israel, due to the sale of an asset purchased abroad during the period when the returned resident was a foreign resident and exemption for 5 years on passive earnings originated from assets purchased abroad during the period of being a foreign resident.      

The new benefit in the correction for "regular" returning resident, relates in a specific and explicit manner to the investment portfolios purchased during the period when the returning resident was a foreign resident. As long as the returning resident has no new additional financial investments, then the income produced from the investment portfolio will be tax exempt.

The classification of foreign resident was broadened, so that an Israeli resident that has stayed abroad for a continuance duration of 4 years, while in the first 2 years he or she stayed abroad for at least 183 days of the tax year, and in the last 2 years out of the 4 years aforementioned, achieved the conditions of keeping a life center abroad, will not be considered as an Israeli resident since "Day One", meaning the counting of its absence from Israeli, for its classification as a returning resident, can start from the first day of leaving Israel.

9.

Following is a summarizing table demonstrating the previously existing law and the current correction:

Type of relief from tax

The previously existing law

The current correction

Status

New Immigrant

Returning Resident

New immigrant and senior returning resident considered as immigrant

Tax exempt due to passive earnings

5 years

5 years

10 years

Tax exempt due to capital gains

10 years

10 years

10 years

Tax exempt due to business earnings

4 years

X

10 years

Tax exempt due to occupation and employment

X

X

10 years

Inception additionally regarding new assets or activities

X

X

V

Acclimation course via "adaptation period" (see note 3 above)

X

X

V

Relief on the "control and management" test  - Controlled foreign company" (see note 5 above)

X

X

V

Exempt from reporting and disclosure obligation (see note 6 above)

X

X

V