One of the most exclusive but deceiving benefits that an “Ole Chadash” and a “Senior Returning Resident” entitled to, is the 10 years exemption of both passive (interest, dividends, rent, capital gain etc.) and active (labor, business) incomes generated abroad.

However, a very common mistake, hence the referral as deceiving, made by those first/second-time residents “Olim” and “Toshavim Chozrim Vatikim” is to think that if they have a running business in the country of origin, whether they came with or established after becoming IL residents, the incomes from this business are exempt of blue-white (Israeli) taxation for 10 years.

Many of those have the business established under a company, usually a transparent entity – LLC / s-corp etc., which is registered in their country of origin. In most cases their company abroad is held 100% by them only, and the business’ core activity is done by them – whether by providing services from IL or even supplying goods (drop shipping via online stores etc).

After moving to Israel, they mistakenly think that the incomes they generate from Israel are not taxable and are fully exempt under the 10 years holiday they deserve. That’s because the company’s clients are all foreign, payments are wired to their company’s foreign bank account, the company is only registered abroad etc.

Having such business activity from Israel would probably fall into the tax trap of a “Permanent Establishment” in Israel, and therefore be taxed in Israel. Meaning, although the company is registered abroad, the fact that its activity is done by a one man show in Israel, creates a “Permanent Establishment” in Israel and expose its incomes to IL taxation.

The ITA published circular 1/2011 and specify there that such a case wouldn’t be entitled to the exemption that the law intended to provide.

Important: having a business abroad that is solely run and controlled from IL won’t fall under this definition according to the law.

Since the law is pretty vague about such cases (the ITA’s approach is only an interpretation of  the law), a different approach might be considered in order to have those incomes exempt after all (fully or partly), but only if other criterions apply at the same time (i.e employee/s abroad, sub-contractors abroad, offices abroad, self-functioning mechanism abroad etc.).