Israel's 10-Year Tax Holiday For Immigrants Is No Tax Haven For Ex-Pats

Kevin E. Packman is a Partner in our Miami office

While Israel welcomes immigrants, and even provides them with tax incentives, it is serious about ending any perceived notion that it is somehow complicit with taxes evaded by its foreign residents in their home country. As such, it plans to release information on accounts held by foreign residents to foreign tax authorities. Israeli residents who invest in the United States should also take note that the exchange of information will be reciprocal in nature.

Generally speaking, Israel taxes its residents on their worldwide income. However, the Israeli government provided a financial incentive to encourage immigration to Israel, otherwise known as aliyah. In 2008, Amendment 168 to the Income Tax Ordinance provided new immigrants and returning Israelis with a 10-year tax holiday. The holiday is actually a generous tax exemption that permits these new or returning residents to exclude their foreign income and capital gains from reporting and taxation in Israel. The exemption even extends to foreign income and capital gains obtained during the first 10 years of Israeli residency. Prior to Amendment 168, the exemption lasted for only five years.

Americans Are Still Liable For US Taxes

Perhaps because of or in spite of Amendment 168, a number of Americans became full time or part time residents of Israel. As such, it is natural that they would open one or more Israeli bank accounts. Furthermore, even if these individuals knew that they were supposed to continue filing United States income tax returns by virtue of their United States status, many of these Americans probably never heard of an FBAR.Therefore, these individuals failed to report the existence of their Israeli accounts to the United States authorities or to pay tax on these accounts. This should come as no surprise since, prior to 2009, many tax practitioners in the United States were unfamiliar with the extent of the FBAR filing obligation. Notwithstanding, some of the these individuals who failed to file FBARs did so willfully.

Israeli Tax Authority and Banks Cooperating With US Enforcement Efforts

As a result, at least three Israeli banks (or their Swiss subsidiaries) are part of United States enforcement efforts. These banks are reported to be Bank Leumi, Bank Hapoalim and Mizrahi Bank. On February 14, 2014, Monajem Hakimijoo, known as Manny Hakimi, a United States citizen pled guilty in Beverly Hills, California, to having held an...