There is a saying: May you live in interesting times. This is a polite reference to tumultuous times.
The war here is an interesting time. A few Israelis have upped and moved to other countries due to the war. But propaganda about the war has triggered antisemitism in many countries, resulting in higher migration to Israel (aliyah).
In our experience, a key question concerns pensions. How will they be taxed?
This article deals with Israeli taxation of olim (immigrants) to Israel. In a later article, we will discuss pension taxation for people leaving Israel, as there was an “interesting” (in the Chinese sense) court case on this recently.
Israeli tax on foreign pensions
Israel exempts foreign pensions and other foreign income for 10 years in the case of new residents and “senior” returning residents who were resident abroad at least 10 years. From year 11, for foreign pensions, you can generally choose between: (1) 35% exemption; or (2) Israeli tax capped at whatever tax you would have paid in the old country.
When do you become an Israeli resident?
Moving your center of living to Israel is needed, having regard to your economic family and social circumstances. That is vague, so the Israeli tax law also contains rebuttable presumptions of Israeli residency: (1) in Israel 183 days in the tax year; (2) in Israel 425 days over any three-year period, including at least 30 days in the latest year. A day includes part of a day. The Israeli tax year ends December 31. New residency proposals are being formulated.
Old country taxation: This is where the going gets tougher. Most of Israel’s tax treaties exempt pensions in the old country if they are paid to people who took up Israeli fiscal residence. Israel has tax treaties along these lines with around 60 countries. But those countries usually need proof of Israeli residency from the Israel Tax Authority – in English but not Hebrew, of course.
The English-language skills of Israeli tax officials are often below par. So, it is necessary to file online requests for confirmations of Israeli fiscal residency – typically in a special box on the screen of Shaam, the ITA’s system for accountants.
The result is an English “stand-alone” letter from the ITA on its letterhead, confirming that the individual is now resident in Israel. For some overseas tax authorities, this is enough. Others want the ITA to sign and stamp their own form.
Once these confirmation procedures are sorted out, an oleh may enjoy both the 10-year Israeli tax exemption and an exemption in the old country for that pension, subject to the terms of the relevant tax treaty between Israel and the old country. This should be checked.
UK olim: Some tax officials at HMRC (His Majesty’s Revenue and Customs) want a form of theirs (Form DT – Individual) stamped, even though Footnote 4 says a “stand-alone” letter is sufficient.
US olim: The US-Israel tax treaty is “interesting” (see above). It contains an exemption from Israeli tax for US pensions and annuities, generally. However, there is also an override rule in that treaty known as the “savings clause,” which says the US may tax its citizens (i.e., US olim) as if no treaty had come into effect.
Therefore, US olim typically find themselves paying US tax on US pensions during the 10-year Israeli tax holiday. After the 10-year tax holiday ends, US tax on US pensions continues, so it is customary to invoke the rule that no further Israeli tax applies to those pensions.
The terms “pension” and “annuity” in the US-Israel tax treaty might be construed as covering not only US pensions but also individual retirement account (IRA) payments.
The US-Israel tax treaty defines “pensions and other similar remuneration” as periodic payments other than Social Security payments made (a) by reason of retirement or death and in consideration for services rendered, (b) by way of compensation for injuries or sickness received in connection with past employment, or (c) by reason of payments made under a plan benefiting self-employed individuals all or some of the contributions to which qualify for special tax treatment.
The term “annuities” means a stated sum paid periodically at stated times during life, or during a specified number of years, under an obligation to make the payments in return for adequate and full consideration (other than services rendered).
US Social Security is exempt in both the US and Israel under the US-Israel tax treaty.
Conclusion: May we all live in uninteresting times…..
As always, consult experienced tax advisers in each country at an early stage in specific cases.
leon@hcat.co
The writer is a certified public accountant and tax specialist at Harris Consulting & Tax Ltd.