Whenever an Israeli resident relocates his life center abroad, an “Exit Tax” applies from the Israeli taxation perspective.

An “Exit Tax” according of paragraph 100A of the Israeli Tax Ordinance, is a tax event that occurs when someone has tangible or intangible assets, that he owned before leaving Israel (and didn’t sell it prior the relocation day), and therefore these assets are considered by the ITA as sold at the relocation day (assets of personal use – cars, furniture etc. are exempt of taxes either way).

This situation is relevant and very crucial to all High-Tech people in Israel who have financial assets (shares / options / stocks / bonds) they possessed prior their relocation, and that would sell it in the future as residents of another country. This is extremely common in situations of selling options after the vesting period.

Paragraph 100A allows these people to pay taxes at the day of the sell itself (instead of paying it at the relocation day) on the part of holding the financial asset while they were still IL residents.

What happens when someone holds an LLC (Limited Liability Company) shares prior the relocation and then sell it after becoming a US resident?

According to a ruling decision published recently by the ITA, someone who held such shares, was allowed to pay taxes on the IL part – the time he held the shares while still living in Israel – but was denied of receiving a credit for the taxes he would pay in the US for the sale (hence a double taxation problem).

The reason is, that the US-IL tax treaty does allow such credit of taxes paid in the country of income source (in our case – the US) but the treaty excluded from the definition of such company – an LLC. If the shares are of an LLC, no credit would be given by the ITA, and the IL is entitled to receive all the taxes for such sale from the IL tax aspect.