Tax Issues for Israelis in the US planning to return to Israel. Webinar presented by Philip Stein, 2010

1. With an Eye to ZionTax Issues for Israelis in the US Planning to Return to Israel

2. What Should You Be Planning for? Minimize US taxes in year of departure Maximize use of Israeli tax benefits for returning residents

3. Minimizing federal tax Minimizing state tax Being aware of estate tax Don’t trigger exit tax Minimizing Taxes in Year of Departure

4. Questions you need to ask Am I a US resident? Am I a US citizen? How long have I had a green card? Am I a resident of one of the 50 states?

5. US Residency Physical Presence – Counting Days Current year 1 day = 1 day Prior year 3 days = 1 day 2 years back 6 days = 1 day Total exceeds 182 days - you are a resident Green Card Test Treaty can always override US law

6. US Citizenship By birth Naturalized Through US grandparents

7. Can I Keep My Green Card?orCan I Have My Cake and Eat it too? 8 out of 15 year rule Using the treaty Risk of losing green card

8. State Tax Residency Where was I domiciled? Every state has its own rules How do you break residency? Part year resident versus nonresident

9. Dual Status Federal Tax Year of departure Later you leave, the higher your taxes Timing is everything

10. Dual Status State Tax The difference a day makes Active Income Passive Income Capital Gains

11. US Tax Considerations in Year Departure Salary or Business Investment Income Retirement Income Marital Status Dependents

12. Salary or Business Income Salary – Can I still work for my US employer after I leave the US? Consultant – How many days in the US –state tax – city tax? Don’t forget visa issues

13. Investment or Passive Income Interest Dividends – Withholding Capital Gains – 182 day rule Rental income Sale of primary residence

14. Your Retirement Savings To withdraw or leave in 401 (k) IRA Roth IRA’s

15. Social Security Are you in or out of the system? 40 quarters How much is a quarter? How much will you get? What if you are short?

16. Marital Issues Filing Status in year of departure Are you married to a US citizen? Elections to make Head of household

17. Dependency Issues Can your children still be claimed as exemptions? Child tax credit Education credits

18. W-8 Ben or W-9 Non residents W-8 Ben US citizens always W-9! Who do you inform? When do you inform? The patriot act

20. Where were they vested?

21. Are they part of a 102 plan?

25. Quantitative Presumptions A presumption that the center of an individual’s life is in Israel applies if: The individual stayed in Israel during the tax year for a period of 183 days or more; or - The individual stayed in Israel during the tax year for a period of 30 days or more and the total period of his stay in Israel in the current tax year and the two years preceding it is 425 days or more. The presumption could be rebutted by either the individual or the assessing officer Exceptions: an employee of the State of Israel, an Israeli Municipal authority, the Jewish agency, etc.

26. Qualitative Tests The ultimate test – the center of life test: Examination of the overall family, economic and social ties to Israel in light of individual circumstances (Gonen High Court ruling) Non formal rather than quantitative examination Objective test – location of the majority of an individual’s relations (physical examination) Subjective test – the location the individual perceives as his center of life (examination of intention)

27. Effective Date of Becoming an Israeli Resident Specific date or entire tax year? Numerous tax resolutions indicate a tendency to attribute the change in residency to the beginning of a specific tax year, unless circumstances explicitly indicate that the change in residency can be attributed to a certain date or month Under the Tax Authority’s guidelines, the earliest of the following should be regarded as the arrival date: Date of Aliya under Ministry of Absorption criteria

28. The first day a permanent home was available in Israel for the new-comer and his arriving family members, and if he is single the first day a permanent home was available for him while in Israel while not having another permanent home outside Israel. The first day in Israel in a tax year in which the new-comer eventually stayed in the aggregate more than 183 days Effective Date of Becoming an Israeli Resident

29. Dual Residence and "Tie-Breaker" Rules Tie-Breaker rules under the convention between the government of the United States of America and the government of the State of Israel with respect to Taxes on Income (the “Treaty”): Dual residence might arise under Article 3(1)(b)(ii) of the treaty that stipulates: “Resident of the United States” means: any other person resident in the United States for purposes of United States tax. . . ”.

30. "Tie-Breaker" Rules Article 3(2) hierarchal tests: Permanent home Center of vital interests If a permanent home exists in both states or in neither of the states – deemed to be a resident of the state with which his personal and economic relations are closest. An “Oleh”’s center of life will be deemed to be in Israel. Habitual abode If center of vital interests cannot be determined – he is deemed to be a resident of the state in which he has an habitual abode.

31. Nationality If the individual has an habitual abode in both states or in neither of them – he is deemed to be a resident of the state of which he is a citizen If an Individual is a citizen of both states or of neither of them – the competent authorities of the contracting states shall settle the question by mutual agreement "Tie-Breaker" Rules

32. Expansion of Tax Benefits Under Amendment 168 of the Income Tax Ordinance Additional tax benefits applicable to new immigrants and veteran returning residents (“Eligible Individuals”) under Section 14 of the Income Tax Ordinance: Tax exemption on business and foreign employment income generated outside Israel for a period of 10 years. Tax exemption on capital gains on the sale of non-Israeli assets for a period of 10 years, including assets purchased after the immigration date. A partial linear exemption shall still apply after the 10 year period.

33. Expansion of Tax Benefits An Eligible Individual will not be considered a "controlling shareholder" of a "Controlled Foreign Company" as defined in Section 75B of the Income Tax Ordinance– a tax benefit in relation to imputed dividend income deriving from passive income of a foreign company. Tax benefits relating to foreign trusts. Tax exemption for income attributed to an Eligible Individual deriving from a “Foreign Occupation Company” as defined in section 5(5) of the Income Tax Ordinance for a period of 10 years. Please note – determination of the effective date of becoming an Israeli resident is critical.

34. Adjustment Period An Eligible Individual may elect, 90 days from his arrival date, not to be considered an Israeli resident for tax purposes for a one year adjustment period, commencing the date of arrival to Israel. The Adjustment Period will be counted for the purpose of any exemption period, should he stay in Israel.

35. A Foreign Company Controlled and Managed in Israel A foreign company controlled and managed in Israel is usually regarded as an Israeli resident company for tax purposes Following Amendment 168, a foreign company controlled and managed in Israel by an Eligible Individual (the “Controlled Company") will not be deemed for a 10 year period as an Israeli resident company for tax purposes An exception applies in relation to a foreign company whose operation could not exist without having its business activity controlled and managed in Israel

36. Foreign Company Non-Israeli source income of a foreign company managed and controlled by an Eligible Individual will not be subject to Israeli corporate tax for a period of 10 years Interest and dividend income derived by the eligible Individual from such company will also be tax exempt for a period of 10 years

37. Dividend B Dividend C Foreign company A Israeli company C Foreign company B Israeli Source Income Foreign Source Income World Wide Income Illustration of Holding Alternative Structures New “Oleh” Dividend A

38. Exemption on Foreign Currency Bank Deposits Interest income on foreign currency deposits of new immigrants is exempt from tax for 20 years as of the date of immigration . Various conditions are required, some highlights follow: Highlights: source of funds should be from money held outside Israel before arriving in Israel; Deposit should not be for the purpose of making or securing a loan to a relative or a controlled entity; A timely declaration is mandatory.

39. Returning Resident Vs. Veteran Returning Resident A “Returning Resident” is an individual who returns to Israel after at least 6 consecutive years in which he/she has been non-resident. Under the transitional law provisions, the old definition, which required from the individual to be non-resident for at least 3 consecutive years, still applies to an individual who has returned to Israel before January 1st, 2009. Returning Residents do not enjoy the more extensive tax benefits applicable to Veteran Returning Residents. A “Veteran Returning Resident” is an individual who returns to Israel after at least 10 consecutive years during which he/she has been non-resident. Under the transitional provisions, an individual who returned within the 2007-2009 period will be deemed as a “Veteran Returning Resident” after a shorter 5 consecutive years period of being a “Foreign Resident”.

40. Philip Stein & Associates Ltd. pstein@pstein.com admin@pstein.com www.pstein.com U.S. Phone: 866-995-1040 U.S. Fax: 866-611-8256

41. December 2010 Los Angeles Dec. 12th-13th San Francisco Dec. 13th-14th Chicago Dec. 15th-17th NJ/NY Dec. 19th- 20th pstein@pstein.com admin@pstein.com www.pstein.com

42. Iddan Dinai Iddan Dinai, Adv. heading partner of the direct tax practice at the Sadot & Co. Law Firm www.sadot-law.co.il iddan@sadot-law.co.il Phone: +972-3-6122611