Clause 14(a) to the IL Tax Ordinance allows First Time Residents (mostly Olim) and Senior Returning Residents (who stayed more than 10 years abroad after leaving IL) to enjoy a complete tax exemption on work done outside of IL for 10 years since they became residents (for the 1^st time or again).

However, the exemption is given only if the work is actually done outside of Israel, otherwise, full taxation would apply.

In addition, passive incomes such as Dividends, Interest, Royalties and rent incomes would be exempt as well if the source of income resides outside of Israel.

According to clause 14(c)(1), the exemption of passive incomes also applies to Regular Returning Residents, who were abroad for at least 6 years, but the period of time they can exploit the passive incomes exemption is only 5 years (and not 10 as for the First Time Residents and Senior Returning Residents).

A recently published verdict “Yaron Meir Vs. Tax Office Eilat” made justice with such Regular Returning Resident – Mr. Meir – who claimed the passive incomes exemption on Dividends he received during 2013-2016 from a foreign company he owned at BVI.

Eilat Tax Office claimed the Dividends Mr. Meir received during those years, where just a cover for a Director wage, and that he actually received a permanent salary for work he did for the foreign company owned by him, and in this case, he is not entitled to any tax exemption. The Tax office relied on the high number of distributions made – sometimes 2-3 time a month – and argued that Dividends normally aren’t distributed so often and therefore is an actually salary/wage and should be fully taxed in IL.

The District Court accepted Mr. Meir’s appeal and rejected the ITA claim that the Dividends are just a cover for Director wage. The Court said that the Company’s Constitutional Documents state that all profits are distributed when accrued, and therefore its rather acceptable that Mr. Meir received Dividends very often, even a few times per months, and that the law does not specify how often should Dividends be distributed.

Moreover, the District Court rejected the ITA’s claim that the fact that Mr. Meir claimed home expenses to reduce his tax liability, proves that he had a running business from home and let Mr. Meir enjoy the reduction by claiming expenses and the exemption for Regular Returning Resident.