The Israeli Ministry of Finance has recently approved a tax reform regarding benefits to be granted to Israeli new immigrants as well as "returning residents" as of January 1st 2008. The reform, initiated by the ministry of absorption and the Israeli Tax Authorities, was formed as part of the "returning home- Israel's 60th" project.

The reform, providing the above beneficiaries with extensive tax benefits, is aimed to encourage the Israelis leaving abroad to relocate to Israel.

The reform is also projected to be a catalyst for investments in Israel, and would contribute to Israel's financial and social strength.

The approved bill expands, simplifies and elaborates a line of tax benefits regarding the tax liability and reporting obligations of new immigrants, and returning residents in relation to their income generated outside Israel.

The following is a brief summery of the tax benefits included in the reform:

1. An expansion of tax benefits for returning residents

A new status is set- "A senior returning resident"- a returning resident who leaved abroad for at least 10 years.

Notwithstanding the above, in order to encourage the former Israelis to return to Israel during 2008 and 2009, the "senior returning resident" status would also include returning residents who were non-Israeli residents on January 1st 2008, and leaved abroad for at least 5 years.

Needless to say, that the current exemptions rendered to returning residents who were non-Israeli residents for at least 3 years (Hereinafter- standard returning residents), will remain unchanged.

2. Tax exemptions on Passive income

According to the current situation, during the first 5-year period starting as of the arrival/returning date, new immigrants and standard returning residents are tax exempt on their passive income deriving from assets purchased outside of Israel prior to their arrival to Israel (Hereinafter- old assets). For that matter, "Passive income" includes dividend, interest, royalties, rent and allowance.

According to the reform, during the first 10-year period starting as of the arrival/returning date, new immigrants and "senior returning residents" would be tax exempt on their passive income deriving from assets purchased outside of Israel, whether they are old assets or new assets (assets purchased after the arrival/returning to Israel).

3. Tax exemption on capital gains

According to the current situation, during the first 10-year period starting as of the arrival/returning date, new immigrants and standard returning residents are tax exempt on their capital gains deriving from old assets.

According to the reform, during the first 10-year period starting as of the arrival/returning date, new immigrants and "senior returning residents" would be tax exempt on capital gains deriving from assets purchased outside of Israel, whether they are old assets or new assets.

4. Business income

According to the current situation, during the first 4-year period starting as of the arrival date, new immigrants are tax-exempt on their business income deriving from business that was conducted outside of Israel, for at least five consecutive years, prior to their arrival to Israel (Hereinafter- old business).

According to the reform, during the first 10-year period starting as of the arrival/returning date, new immigrants and "senior returning residents" would be tax exempt on business income deriving from business conducted outside of Israel, as well as within Israel.

5. Adaptation period

According to the current situation, an Israeli resident is tax liable in Israel on his worldwide income, and a non- Israeli resident is tax liable in Israel only on income generated in Israel.

According to the reform, new immigrants and "senior returning residents" would be entitled to a 1-year adaptation period in which they would not be considered as Israeli residents, provided that they notify the Israeli Tax Authorities upon this request during the first 90-day period starting as of the arrival/returning date.

6. Foreign corporations controlled and managed by new immigrants and "senior returning residents"

According to the current situation, an Israeli corporation is defined as which if it is controlled and managed form Israel.

According to the reform, corporations managed and controlled by new immigrants or "senior returning residents" would not be considered as Israeli corporations; and therefore would not be taxable in Israel other than on income generated in Israel.

7. Exemption on income tax filings

According to the reform, during the first 10-year period starting as of the arrival/returning date, new immigrants and "senior returning residents" are exempt from filing tax reports to the Israeli Tax Authorities when foreign income or foreign assets are concerned.

Upon the government's approval, the above reform would be brought to the approval of the Knesset during the following Knesset session, and would apply as of January 1st 2008.

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