With an Eye to Zion

Tax Issues for Israelis in the US Planning to Return to Israel

• Minimize US taxes in year of departure• Maximize use of Israeli tax benefits for returning

residents

What Should You Be Planning for?

• Minimizing federal tax• Minimizing state tax• Being aware of estate tax• Don’t trigger exit tax

Minimizing Taxes in Year of Departure

Questions you need to ask• Am I a US resident?• Am I a US citizen?• How long have I had a green card?• Am I a resident of one of the 50 states?

• Physical Presence – Counting DaysCurrent year 1 day = 1 dayPrior year 3 days = 1 day2 years back 6 days = 1 day

Total exceeds 182 days - you are a resident

• Green Card Test Treaty can always override US law

US Residency

US Citizenship

• By birth• Naturalized• Through US grandparents

Can I Keep My Green Card? or Can I Have My Cake and Eat it too?

• 8 out of 15 year rule• Using the treaty• Risk of losing green card

State Tax Residency

• Where was I domiciled?• Every state has its own rules• How do you break residency?• Part year resident versus nonresident

Dual Status Federal Tax

• Year of departure• Later you leave, the higher your taxes• Timing is everything

Dual Status State Tax

• The difference a day makes• Active Income• Passive Income• Capital Gains

US Tax Considerations in Year Departure

• Salary or Business• Investment Income• Retirement Income• Marital Status• Dependents

Salary or Business Income

• Salary – Can I still work for my US employer after I leave the US?

• Consultant – How many days in the US –state tax – city tax?

• Don’t forget visa issues

Investment or Passive Income

• Interest• Dividends – Withholding• Capital Gains – 182 day rule• Rental income • Sale of primary residence

Your Retirement Savings

• To withdraw or leave in • 401 (k)• IRA• Roth IRA’s

Social Security

• Are you in or out of the system?• 40 quarters• How much is a quarter?• How much will you get?• What if you are short?

Marital Issues

• Filing Status in year of departure• Are you married to a US citizen?• Elections to make• Head of household

Dependency Issues

• Can your children still be claimed as exemptions?

• Child tax credit• Education credits

W-8 Ben or W-9

• Non residents W-8 Ben• US citizens always W-9!• Who do you inform?• When do you inform?• The patriot act

Stock Options

• Qualified vs. Non Qualified• Where were they vested?• Are they part of a 102 plan?• Who gets first bite?

Bank Accounts in Israel

• New accounts for returning residents• FBARs• FACTA

Returning Resident

• Toshav Chozer Vatik• Toshav Chozer

Israeli Resident

Law Definition of an Israeli resident

An individual whose center of life is in Israel

The entirety of the individual's family, economic and

social ties should be considered, including:

• The individual’s place of permanent home

• His and his family's dwelling

• The individual’s permanent place of being employed or the permanent or ordinary place of occupation

• The individual’s place of active and substantial economic interests

• The individual’s place of activity in organizations, associations or other institutions

Quantitative Presumptions

A presumption that the center of an individual’s life is in Israel applies if:

• The individual stayed in Israel during the tax year for a period of 183 days or more; or -

• The individual stayed in Israel during the tax year for a period of 30 days or more and the total period of his stay in Israel in the current tax year and the two years preceding it is 425 days or more.

• The presumption could be rebutted by either the individual or the assessing officer

• Exceptions: an employee of the State of Israel, an Israeli Municipal authority, the Jewish agency, etc.

Qualitative Tests

The ultimate test – the center of life test:• Examination of the overall family, economic and

social ties to Israel in light of individual circumstances (Gonen High Court ruling)

• Non formal rather than quantitative examination• Objective test – location of the majority of an

individual’s relations (physical examination)• Subjective test – the location the individual

perceives as his center of life (examination of intention)

Effective Date of Becoming an Israeli Resident

• Specific date or entire tax year?• Numerous tax resolutions indicate a tendency to attribute

the change in residency to the beginning of a specific tax year, unless circumstances explicitly indicate that the change in residency can be attributed to a certain date or month

• Under the Tax Authority’s guidelines, the earliest of the following should be regarded as the arrival date:

• Date of Aliya under Ministry of Absorption criteria

• The first day a permanent home was available in Israel for the new-comer and his arriving family members, and if he is single the first day a permanent home was available for him while in Israel while not having another permanent home outside Israel.

• The first day in Israel in a tax year in which the new-comer eventually stayed in the aggregate more than 183 days

Effective Date of Becoming an Israeli Resident

Dual Residence and "Tie-Breaker" RulesTie-Breaker rules under the convention between the government of the United States of America and the government of the State of Israel with respect to Taxes on Income (the “Treaty”):

Dual residence might arise under Article 3(1)(b)(ii) of the treaty that stipulates:

“Resident of the United States” means: any other person resident in the United States for

purposes of United States tax.” . . .

"Tie-Breaker" Rules

Article 3(2) hierarchal tests:• Permanent home • Center of vital interests

If a permanent home exists in both states or in neither of the states – deemed to be a resident of the state with which his personal and economic relations are closest. An “Oleh”’s center of life will be deemed to be in Israel.

• Habitual abode

If center of vital interests cannot be determined – he is deemed to be a resident of the state in which he has an habitual abode.

• Nationality

If the individual has an habitual abode in both states or in neither of them – he is deemed to be a resident of the state of which he is a citizen

• If an Individual is a citizen of both states or of neither of them – the competent authorities of the contracting states shall settle the question by mutual agreement

"Tie-Breaker" Rules

Expansion of Tax Benefits Under Amendment 168 of the Income Tax Ordinance

• Additional tax benefits applicable to new immigrants and veteran returning residents (“Eligible Individuals”) under Section 14 of the Income Tax Ordinance:

• Tax exemption on business and foreign employment income generated outside Israel for a period of 10 years.

• Tax exemption on capital gains on the sale of non-Israeli assets for a period of 10 years, including assets purchased after the immigration date. A partial linear exemption shall still apply after the 10 year period.

Expansion of Tax Benefits• An Eligible Individual will not be considered a "controlling

shareholder" of a "Controlled Foreign Company" as defined in Section 75B of the Income Tax Ordinance– a tax benefit in relation to imputed dividend income deriving from passive income of a foreign company.

• Tax benefits relating to foreign trusts. • Tax exemption for income attributed to an Eligible

Individual deriving from a “Foreign Occupation Company” as defined in section 5(5) of the Income Tax Ordinance for a period of 10 years.

• Please note – determination of the effective date of becoming an Israeli resident is critical.

Adjustment PeriodAn Eligible Individual may elect, 90 days from his

arrival date, not to be considered an Israeli

resident for tax purposes for a one year

adjustment period, commencing the date of arrival

to Israel. The Adjustment Period will be counted

for the purpose of any exemption period, should he

stay in Israel.

A Foreign Company Controlled and Managed in Israel

• A foreign company controlled and managed in Israel is usually regarded as an Israeli resident company for tax purposes

• Following Amendment 168, a foreign company controlled and managed in Israel by an Eligible Individual (the “Controlled Company") will not be deemed for a 10 year period as an Israeli resident company for tax purposes

• An exception applies in relation to a foreign company whose operation could not exist without having its business activity controlled and managed in Israel

Foreign Company

• Non-Israeli source income of a foreign company managed and controlled by an Eligible Individual will not be subject to Israeli corporate tax for a period of 10 years

• Interest and dividend income derived by the eligible Individual from such company will also be tax exempt for a period of 10 years

Illustration of Holding Alternative Structures

Dividend A Dividend B

Foreign company A Israeli company CForeign company B

Israeli Source Income Foreign Source Income World Wide Income

Dividend C

New “Oleh”

Exemption on Foreign Currency Bank Deposits

• Interest income on foreign currency deposits of new immigrants is exempt from tax for 20 years as of the date of immigration .

• Various conditions are required, some highlights follow: • Highlights: source of funds should be from money held

outside Israel before arriving in Israel;• Deposit should not be for the purpose of making or

securing a loan to a relative or a controlled entity;• A timely declaration is mandatory.

Returning Resident Vs. Veteran Returning Resident

• A “Returning Resident” is an individual who returns to Israel after at least 6 consecutive years in which he/she has been non-resident.

• Under the transitional law provisions, the old definition, which required from the individual to be non-resident for at least 3 consecutive years, still applies to an individual who has returned to Israel before January 1st, 2009.

• Returning Residents do not enjoy the more extensive tax benefits applicable to Veteran Returning Residents.

• A “Veteran Returning Resident” is an individual who returns to Israel after at least 10 consecutive years during which he/she has been non-resident.

• Under the transitional provisions, an individual who returned within the 2007-2009 period will be deemed as a “Veteran Returning Resident” after a shorter 5 consecutive years period of being a “Foreign Resident”.

Philip Stein & Associates Ltd.

pstein@pstein.com

admin@pstein.com

www.pstein.com

U.S. Phone: 866-995-1040

U.S. Fax: 866-611-8256

December 2010

Los Angeles Dec. 12th-13th

San Francisco Dec. 13th-14th

Chicago Dec. 15th-17th NJ/NY Dec. 19th- 20th

pstein@pstein.com admin@pstein.com www.pstein.com

Iddan Dinai

Iddan Dinai, Adv. heading partner of the direct

tax practice at the Sadot & Co. Law Firm

www.sadot-law.co.iliddan@sadot-law.co.il

Phone: +972-3-6122611