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.

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