One of the most important aspects of returning to Israel is distinguishing between the status of a "Returning Resident" and a "Veteran Returning Resident." Each status grants different rights and tax benefits, making it essential to understand the implications of each.
A Returning Resident status is granted to an Israeli resident who severs ties with Israel and moves to live abroad permanently. After spending at least six years outside Israel, they are eligible for this status upon their return to Israel.
Veteran Returning Resident: This status is granted to an individual who has lived outside Israel for at least ten years. You can enjoy significant tax benefits only after you prove that you resided abroad as a foreign resident for this period. However, it is important to note that nothing is guaranteed upfront, and the tax authority examines additional criteria before approving the request for veteran returning resident status. A taxpayer cannot automatically claim tax benefits based solely on the length of stay abroad. Eligibility is granted only after submitting an application to the International Tax Department of the Israel Tax Authority and receiving approval. It is recommended to consult with an international tax accountant for this process.
Overview of Tax Benefits and Rights for Returning Residents
Israel consistently seeks to encourage aliyah and the return of citizens who have left and wish to return. As a result, the state grants a broad range of tax benefits to new immigrants, veteran returning residents, and returning residents.
Returning Resident
Exemption on Passive Income from Abroad: A returning resident is exempt from tax on passive income from abroad, such as dividends, interest, and rental income from foreign properties, for five years from the date of return to Israel.
Exemption on Capital Gains Tax from Abroad: A returning resident is exempt from tax on capital gains from the sale of foreign assets acquired while abroad, for ten years from the date of return, as long as the asset does not grant ownership of a property located in Israel.
Veteran Returning Resident
Exemption on All Income from Abroad: A veteran returning resident is exempt from tax on all income from abroad, including active income (from work, business, or other activities) and passive income (interest, dividends, rental income), for ten years from the date of return.
Exemption on Capital Gains Tax from Abroad: A veteran returning resident is exempt from tax on capital gains from the sale of foreign assets acquired before and after returning to Israel, for ten years.
Exemption from Reporting Income and Assets from Abroad: A veteran returning resident is also exempt from the requirement to report their foreign assets and income to the Israel Tax Authority for ten years from the date of return. Due to a change in the law, this benefit will be canceled for those returning to Israel after January 1, 2026.
Eligibility for Adjustment Year: This option is available only to veteran returning residents and new immigrants. For more information about this benefit, click the link.
Submitting the Application to the Israel Tax Authority and Obtaining a Professional Opinion Regarding Returning Resident Status
To take advantage of the rights and benefits for returning residents, you must submit an application to the Israel Tax Authority and receive official approval. Residency status is not granted automatically based solely on the number of days spent outside Israel. The assumption that the length of stay abroad alone guarantees tax benefits is incorrect. The tax authority examines additional qualitative criteria, such as the center of life, economic ties, and family connections. The decision is based on the information provided in the application. Any resident seeking recognition as a "Returning Resident" must submit a request for a tax ruling. A response will be provided only after submitting the application to the International Tax Department of the Israel Tax Authority, along with supporting documentation.
You can apply to the tax authority through an accountant by submitting a written preliminary request (ruling) for a tax decision. The request must include all relevant facts and arguments for the decision. The tax authority will then classify the applicant as a "Returning Resident" or "Veteran Returning Resident" or reject the request. For more information on tax residency, click the link.
There is also an option to submit an anonymous application, allowing for a written request without revealing the applicant's identity. This option is suitable for those who lived abroad but are unsure of their residency status, or for those applying after returning to Israel.
It is highly recommended to obtain a professional opinion from an accountant specializing in international taxation. A professional opinion will help you understand the tax implications and ensure you take full advantage of the benefits available to you, avoiding any unwanted legal or financial consequences.
First Tip: The Importance of Obtaining Approval from the Tax Authority Before Returning to Israel and Before Utilizing Tax Benefits
Ensure that you are eligible for "Veteran Returning Resident" status.
As mentioned above, veteran returning resident status is granted to individuals who have lived outside Israel for at least ten years. You can enjoy the benefits only after proving that you lived abroad as a foreign resident for this period. It is important to emphasize that nothing is guaranteed in advance. The tax authority evaluates additional factors before approving the application. A taxpayer cannot claim tax benefits automatically based solely on the number of days spent abroad. Eligibility is granted only after submitting an application to the International Tax Department and receiving approval from the tax authority.
Some returning residents have taken advantage of tax benefits without obtaining the appropriate approval from the tax authority. After several years, they received inquiries from the authorities asking to review their reports. The authorities wanted to verify whether these individuals were eligible for the returning resident status that enabled them to utilize the benefits. The tax authority discovered that these individuals were not eligible for the tax benefits. As a result, they were required to pay taxes on income that they had not reported. This resulted in debts amounting to tens of thousands of shekels. These cases highlight the importance of obtaining formal approval from the tax authority before utilizing the benefits.
Case Study: Assessing Eligibility for Veteran Returning Resident Status
The earlier the evaluation, the more flexibility there is for adjustments and adaptations. An evaluation conducted after returning to Israel may be too late and could jeopardize the chance of receiving tax exemptions. Therefore, it is recommended to assess in advance whether you qualify as a "Returning Resident" or "Veteran Returning Resident." This evaluation should be conducted while still abroad, once you have decided to return to Israel.
In a recent case handled by our firm, we received a request from an individual who returned from Germany after 15 years. The individual sought to examine his eligibility for veteran returning resident status after being contacted by the tax authority. The tax authority asked him to provide information and facts to support his claims regarding his residency status. After investigating and reviewing his income during the benefit period, the tax authority required him to pay taxes on all his foreign income. The taxes were imposed from the date he transferred his center of life back to Israel.
The individual believed he was entitled to tax benefits under veteran returning resident status. Therefore, he refrained from reporting to the tax authorities, based on a certificate issued by the Ministry of Absorption. He was unaware that the certificate did not grant tax benefits. The tax authority clarified that only those who meet the definition of a "Returning Resident" or "Veteran Returning Resident" are eligible for tax benefits.
In our review, we found that while he had lived abroad for 15 years, only 9 years and 8 months were as a foreign resident. He needed an additional 4 months to meet the criteria for the status. If he had conducted the evaluation before returning to Israel, he could have prepared accordingly and avoided this mistake. Even if he had been found eligible, he would have needed to proactively submit an application to the tax authority. The application should have been submitted through an accountant to ensure he was recognized as a "Returning Resident."
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