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The Major tax benefits for New Immigrant and Veteran Returning Resident

The major Tax Benefits for First Time Residents and Veteran Returning Residents, who arrive to Israel after January 1, 2007, during the first ten years in Israel (the “Benefits Period”), according to the Ordinance are as follows:

Exemption from Israeli income tax for the Benefits Period

Section 14 (a) of the Ordinance, grants an exemption from income tax for First Time Residents and for Veteran Returning Residents, on income that accrued outside of Israel from the sources listed in Sections 2, 2a and 3 of the Ordinance. This exemption is granted for the Benefits Period.

In the light of the above, Veteran Returning Residents are entitled to a broad exemption that applies to active incomes such as business and employment income outside of Israel as well as passive incomes from dividends, interest, royalties etc., as long as such are generated or accrued outside of Israel.

It should be emphasized that, according to the ITA’s position, as performed in the Circular 1/2011 and other publications and Supported By Talmi Case, full exemption will not be applied on mixed incomes, i.e. income that a part of it produced in Israel and a part of it produced outside of Israel. In addition, business activity in Israel in relation to foreign Entities, may raise a permanent establishment in Israel to those Entities.

Exemption from Capital Gains Tax during the Ten Years Period

Section 97(b)(1) of the Ordinance grants First Time Residents and Veteran Returning Residents an exemption from capital gains tax derived from the sale of an asset located outside of Israel. This exemption is applied during the Benefits Period, provided that the asset did not come into the individual’s possession as an exemption gift under Section 97(a)(5) of the Ordinance (gift from "relative" who is an Israeli tax resident).

As can be inferred from the above, a First Time Resident or a Veteran Returning Resident are exempt from capital gains tax resulting from the deposition of an asset outside of Israel, as long as the sale was carried out within the Benefits Period. In addition, it should be mentioned that the Section 97(b)(3) of the Ordinance grants a partial exemption, in cases where the asset was purchased prior to the lapse of the Benefits Period but sold afterwards.

Furthermore, according to the Section 97(B3) of the Ordinance a First Time Resident or a Veteran Returning Resident are in principle exempt from capital gains derived from the sale of shares (securities) of an Israeli company, also after the Arrival Date, provided that the shares were acquired by a First Time Resident or a Veteran Returning Resident while being a Foreign Resident before the Arrival Date.

Exemption from Reporting

Section 134B of the Ordinance grants First Time Residents and Veteran Returning Residents a broad exemption from reporting their income, which is sourced outside of Israel, during the Benefits Period.

Respectively, Section 135(b) of the Ordinance states that First Time Residents and Veteran Returning Residents will be exempt from submitting to the ITA, a Capital Statement of their assets located outside of Israel, during the Benefits Period.

Inapplicability of the Management and control Test

Pursuant to the Section 1 of the Ordinance two alternatives tests apply to classify a "body of persons" (including a company) as an Israeli resident for tax purposes. Under the first test, a "body of persons" which was incorporated in Israel is treated as an Israeli resident for tax purposes. Pursuant to the second test a body of persons whose management and control is performed from Israel also constitutes an Israeli tax resident (the "Management and Control test").

The determination of management and control is dependent to a large extent on the relevant facts and circumstances.

It should be emphasized that the Management and Control test is basically doesn’t apply to First Time Residents and Veteran Returning Residents with in the Benefits Period, unless the management and control carried out from Israel by others but the First Time Residents and Veteran Returning Residents. Though the ITA may claim that the activities of the First Time Residents and/or Veteran Returning Residents in Israel create permanent establishments to the foreign company in Israel.

Inapplicability of the Definition of a “Controlled Foreign Corporation” (the "CFC")

Article 75B of the Ordinance defines the CFC, as a foreign company, in which the majority of income and profits are from passive sources outside of Israel, and in which more than 50% of the means of control of the company, are held, directly or indirectly, by Israeli tax residents.

In accordance with the provisions of the Section 75B of the Ordinance, Israeli Residents, who meet the conditions of the definition "controlling shareholders" in the CFC, should be taxed each year as if dividends were distributed, even if the CFC did not actually distribute dividends in that year (“deemed dividends”).

However, Section 75B(a)(15) of the Ordinance stipulates that First Time Residents and Veteran Returning Residents will not be considered as ”Israeli Residents” for CFC purposes, during the Benefits Period.

Inapplicability of the Definition “Professional Foreign Company” (the "PFC")

In General, the PFC is a foreign company which provides special services outside of Israel and at least 75% of its' means of control are held by Israeli tax residents. Similarly to the CFC regime, the Section 75B1(d) of the Ordinance stipulates that, the revenues of the PFC will be deemed as a distributed dividend to its Israeli controlling holders and will be subject to company tax rate of 23%. Upon a real distribution, the Israeli controlling holders will be subject to additional dividend income tax in Israel.

However, the Section 75B1(2) of the Ordinance states that, in examining the percentage of the controlling holders, who are Israeli tax residents in the PFC, the holdings of First Time Residents and of Veteran Returning Residents should not be considered during the Ten Years Period. The Section 75B1(d)(4) further clarifies that First Time Residents/Veteran Returning Residents' tax exemption should be applied on a deemed dividend during the Ten Years Period.

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