The Taxation System in Israel – Emphasis
on “Foreign Residents” and
“Senior Returning Residents“
The tax method in Israel is the “personal” method.
Which means: A person who is considered a “resident of Israel” for tax purposes is required to report his income from all sources of income in Israel and abroad, once a year in his annual report to the Israel Income Tax Authority.
A person who is not a resident of Israel for tax purposes is referred to as a “foreign resident“.
A foreign resident is required to report in Israel only on income generated in Israel.
The tests that the Israel Tax Authority usually applies to determine if a person is considered a resident of Israel are based on an examination of his center of life and affiliation with Israel. In addition, a test is made for days of stay in Israel each year, or cumulative in the tax year, two consecutive tax years preceding. A person who was in Israel over 183 days in a certain tax year or was in Israel 30 days and at least 425 days cumulative in the tax year and in the two years preceding it, support the definition of days of residency for the status as a resident of Israel.
A foreign resident can generate income in Israel from many sources, such as the sale of an asset, including real estate, salary, a business, capital market transactions, rent, and more.
A Little About Real Estate Transactions
In Israel, there is a difference between a person being defined for tax purposes as a resident of Israel or as a foreign resident. When purchasing a real estate asset, the buyer is subject to a purchase tax. The purchase tax that applies to a foreign resident is, similar to a real estate investor, 8% for the buyer of a residential apartment on part of the value up to NIS 5,525,070, and 10% on the part of the value over NIS 5,525,070. All information is correct for the 2022 tax year.
An Israeli resident is subject to reduced tax levels when purchasing a first or single apartment.
There are alternatives when a “foreign resident” can benefit from reduced purchase tax rates. If the foreign resident plans to move the center of his life to Israel, he will have the benefit of reduced tax rates that apply to an Israeli resident, even if he purchased the asset up to two years before arriving in Israel, provided he does not have an additional apartment in Israel.
A foreign resident who immigrates to Israel, and has new immigrant status, will pay purchase tax on the first apartment in Israel, on condition that he purchased it for his personal use, at the following rates: for part of the value up to NIS 1,902,945, he will pay 0.5% purchase tax, and 5% on any excess over said amount. The right is reserved for a transaction up to one year before immigration to Israel and up to seven years after immigration to Israel.
The sale of an apartment is subject to land betterment tax, which is similar in nature to capital gains tax.
This means paying a tax of 25% on the portion of the gain from the sale of the apartment.
Real Estate Taxation Law refers to several situations when an exemption from land betterment tax is available on the gain from the sale of an apartment.
Under certain conditions, a foreign resident can also receive an exemption from land betterment tax and,
for example, if he proves to the Israeli Tax Authority that he does not have an apartment unit in his country of residency and in Israel, he has only one apartment in his possession,
which he has held for at least 18 months.
Consulting with a tax expert is recommended before closing a sales transaction.
Generating yielding income or income from the capital markets in Israel and the requirement to submit an annual report to the Israeli Tax Authority
We will now review several situations when a foreign resident will be required to submit an annual report to the Israel Tax Authority.
- Execution through a bank account in Israel, of a capital market transaction in the amount of and over NIS 2,583 million per year.
- Investment in an Israeli company by acquiring rights of 10% or more of the paid-up share capital.
- Residential rental income of over NIS 5,196 per month (this amount is updated annually).
- Operating a business for over 180 days during a tax year.
There are situations in which a foreign resident, even though he has generated income in Israel, will be exempt from submitting an annual report to the Israel Tax Authority.
If 47% tax is deducted in full from the operation of a business, and the annual income does not exceed NIS 665,000, or in the case of rental income if 30% tax is deducted against the income and the income did not exceed NIS 345,000 per year.
Note: The numbers in this chapter refer to the 2021 tax year.
It is recommended to consult with a Certified Public Accountant in Israel who specializes in Israeli taxation, because in practice the tax may be less than the maximum rate and it would be worthwhile to submit an annual report instead of paying a high tax rate.
Submitting the annual report to the Israel Tax Authority can help with overall reconciliations in respect of taxes in the country of residence.
Israel has signed a series of Tax treaties with many countries, including the United States, the United Kingdom, France, South Africa, Argentina and more. The treaties prescribe the details for the taxation of a foreign resident in Israel and in the country of residence.
Senior Returning Resident
A resident of Israel can be granted status as a senior returning resident if he was a resident of a foreign country for over 10 years.
In order to receive the tax benefits to which he is entitled, the returning resident is required to settle his status with the Israel Tax Authority through an orderly written application.
It is advisable to submit the application through a Certified Public Accountant. It is also recommended to make a preliminary inspection before returning to Israel.
We stress that a returning resident certificate issued by the Ministry of Absorption does not entitle the holder to tax benefits.
A senior returning resident may receive an extended tax basket of benefits, as detailed below:
- A 10 year tax exemption for non-business income (“passive income”);
- A 10 year tax exemption in respect of income from salary, occupation or a business, generated abroad;
- A 10 year tax exemption in respect of capital gains from the sale of assets abroad will also apply to assets purchased abroad during the period of being a senior returning resident.
The senior returning resident does not have to include, in a “capital statement” or annual tax report, details of his income from abroad and details of income generated from assets outside Israel for 10 years
from the date he became a resident of Israel.
He will be considered a resident of Israel when purchasing an asset in Israel and is entitled to pay purchase tax as a resident of Israel.
There is also the status of an ordinary returning resident who is also entitled to several tax benefits.
An ordinary returning resident will be considered a person who has cut off the center
of his life from Israel for at least 6 consecutive years.
An ordinary returning resident is entitled to the following tax benefits:
- Tax exemption for 5 years in respect of non-business income (“passive income”)
- Tax exemption for 10 years in respect of capital gains from the sale of assets abroad, provided that the asset was in his possession before returning to Israel.
Avayo, Sastiel & Mor is managed by 3 partners, with offices in Jerusalem and Tel Aviv.
Partners–Eyal Mor, Nir Sastiel and Jacky Avayo have over 20 years of experience and
are experts in taxation in Israel.
We look forward to meeting with you for a consultation.
By phone 02-6511129 or 03-6399699,