New Israeli Residents – Recent court tax rulings & Corona

Posted on 6 January 2021

Two new court rulings were published in Israel in December 2020 which cast some light on the interpretation of the tax benefits provided to New Residents (i.e. returning residents to Israel after more than 10 consecutive years of being foreign residents, those who lived abroad for 5 years and returned to Israel between 2007 and 2009 and new immigrants from 1 January 2007).

Israeli tax residents are taxed in Israel on their worldwide income (subject to relevant tax treaties). However, New Residents are exempt from tax and reporting on foreign sourced income and capital gains for a period of ten years. This includes an exemption from the obligation to submit capital declarations. The rules are clear in relation to passive foreign income and gains – for example, foreign investment income, foreign rental income and the sale of foreign assets. However, the application of the tax benefits for New Residents fall into a ‘grey area’ in relation to mixed employment, self-employment or business income – i.e. where work is performed both overseas and in Israel.

Israeli law determines that the source of employment income is the place from where the work is performed (i.e. the physical presence of the worker). Accordingly, income for work that is performed from Israel is considered as Israeli sourced income and is subject to tax in Israel. Income for work that is performed outside Israel is considered as foreign sourced income and is exempt from Israeli tax for New Residents (for the ten-year period). The identity of the employer does not affect the determination of the source of the employment income nor does the country of the bank where the income is deposited. The ITA considers that when the work is performed both in and outside Israel, the Israeli income which is subject to Israeli tax should be determined based on the apportionment of the working days that the individual spent in Israel. However, for some New Residents this methodology of apportioning income for the number of Israeli working days may not truly reflect their working position. There are a number of rationales here and as always, this can be open to interpretation. A taxpayer may therefore choose to allocate his income based on a different methodology, provided the taxpayer can substantiate such allocation and provide relevant supporting information and documentation requested by the ITA. We always advise that professional advice is sought and of course that any strategy is documented well and reasonable assumptions are made for each individual’s specific circumstances.

Naturally, the Israeli Tax Authority (“ITA”) interprets the tax exemptions and the allocation between ‘foreign income’ and ‘Israeli income’ in a more limiting manner and this is evidenced by two recent court rulings in Israel.

The ITA previously clarified a "de minimis" rule whereby if taxpayers spend less than 60 business days outside of Israel during the tax year, their entire income is deemed as Israeli income and therefore taxed as Israeli sourced income. We note that the "de minimis" rule is not part of the legislation but this may be a point for consideration for New Residents for 2020 when many were unable to travel as a result of Covid-19 travel restrictions.

The Talmi Case - Yehuda Talmi v. The ITA

Certainly prior to Covid-19 and the travel restrictions which came with it, many New Residents travelled for work purposes or had businesses overseas. The Appellant in this case is a New Resident entitled to the 10-year Exemption who worked part time in Israel and part time overseas. He claimed that despite the fact that he worked part of the time from Israel, his entire employment income should be exempt from tax. The Appellant's reasoning was that his income should be viewed as income from a "foreign asset" and not as employment income. The alleged "asset" was the product and methods that the Appellant developed while residing outside of Israel, or alternatively his employment contract with a foreign company.

The Israeli Supreme Court ruled in favour of the ITA and accepted its position that the Appellant had no "foreign asset" in this case, and that his income was active employment income. The Supreme Court also confirmed the ITA's go-to-position that New Immigrants should allocate their Mixed Income between the “Israeli income” and “overseas income” based on the days worked in and outside Israel. In this regard, the Appellant failed to prove his claim that another allocation method should apply.

The Court emphasised that the purpose of the Exemption is to provide "tax neutrality" for individuals who consider immigrating to Israel. Accordingly, the Exemption should not apply to income which would be subject to tax in Israel regardless of the tax residency of the individual (for example, employment income). This principle of tax neutrality is therefore a key consideration for New Residents when determining the level of Israeli income and foreign income.

However, the Court decision did mention that in certain cases, royalty income directly connected to business activities (for example, marketing intangibles, work methods and financial instruments) that were developed abroad while the individual was a foreign tax resident, may be exempt from tax.

The Morchan Case v. The ITA and the Israeli Police

In this particular case, the Claimant was suspected of criminal offences. As part of the criminal investigation, she was requested to provide information on her worldwide economic activity. The Claimant claimed that as a New Immigrant she has the right not to provide the authorities with any information on her foreign economic activity.

The Supreme Court dismissed the petition and ruled that the discretion of the law enforcement authorities is wide. With regard to the application of the Exemption from reporting which is given to New Immigrants, the Supreme Court mentioned that the Exemption should not be used as a shelter for criminal activity, and that the Exemption from reporting does not provide immunity from criminal investigation and prosecution. Although this ruling refers to criminal procedure, it reflects the general atmosphere of the ITA and the Court, not to allow the abuse of the Exemption for inappropriate purposes.

Whilst New Residents are exempted from reporting any foreign sourced income and capital gains for a period of ten years, it is interesting to mention that certain financial information is in any case available to the ITA under the Common Reporting Standard (“CRS”). The CRS is the automatic exchange of financial information between over 100 jurisdictions which allows Israel to detect possible offshore tax non-compliance and investigate accordingly.


Whilst the tax benefits for Israeli New Residents are unique, we note that other jurisdictions have similar tax benefits for certain categories of residents. For example, the UK offers a preferential tax regime for those who are UK resident but non-UK domiciled. This renders the UK an attractive place of residence for non-UK domiciled individuals from a tax perspective. We note that the UK since 2017 has also minimised the application of the non-UK domicile regime and amended its legislation accordingly.

Similarly, the tax benefits for Israeli New Residents are extensive but the ongoing trend of minimising the application of these benefits by the ITA must be noted. We also anticipate that the consequences of minimised travel as a result of Covid-19 will have an impact on some of the applications of the tax benefits for New Residents.