The State of Israel offers tax incentives to hi-tech talents to expedite their return from their relocation abroad back to Israel. What are the terms and is it worthwhile to return?
It seems that recently, the hi-tech sector is showcasing in headlines more than ever, especially in light of the increasing amount of Israeli unicorns (start-ups valued at $1 billion or more), as well as the fact that the sector had received the seal of approval as the “locomotive of growth” of the Israeli economy.
Despite that, the hi-tech sector is striving for more employees, and the lack of suitable candidates is slowing down its growth. Due to this state of affairs, the State of Israel decided to launch an initiative, aimed at bringing back Israeli hi-tech talents who immigrated abroad for work purposes, by offering tempting tax benefits.
The situation triggered some uncertainty among Israeli hi-tech experts abroad. What is the essence of these incentives? Is it worthwhile to return? Do the incentives offer a viable alternative? We, Adv. Eli Doron and Adv. Doron Pesso, tax experts at Doron, Tikotzky, Kantor, Gutman, Ness, Amit Gross and Co., have put together a guide that will assist in the decision-making of indecisive hi-tech talents.
Some background
The hi-tech sector in Israel is experiencing a major human resources crisis, which is holding back its growth. Many companies unsuccessfully try to recruit staff members, and the concern is that the current state of affairs will slow down the sector and diminish its development.
It seems that a major part of the problem lies with a concerning phenomenon – talented Israeli hi-tech experts who relocate abroad for positions at multinational corporations, which offer both tempting working conditions, as well as the opportunity to experience a foreign culture and the world at-large.
In addition, when Israeli companies are acquired by foreign corporations, part of the employment terms of key personnel from the purchased company include relocation for a certain period of time, usually to understand how the foreign company works.
Thus, Finance Minister Avigdor Liberman and Science and Technology Minister Orit Farkash-Hacohen jointly lead a program aimed at encouraging hi-tech talents to return to Israel through various tax incentives. The key elements are:
1. Tax exemption on options and assets accumulated by expatriates abroad for those who left more than a year ago.
2. Recognition of the expenses related to relocating back to Israel in addition to an up to two-year adjustment period, up to a cap to be determined.
3. Determination of a maximum tax rate of 30%-35% for those eligible under the Law of Return for a two-year period.
So, what is different compared to the current situation?
In the distant past, those who left Israel were required to reside abroad either for more than five or 10 years to be eligible for tax benefits as “returning residents” or “veteran returning residents.” The current plan significantly reduces the amount of years needed to reside abroad to be eligible for tax exemptions after returning to Israel.
The current eligibility for residents returning to Israel after a period of six to 10 years includes the following benefits (the type and scope of the benefit depends on the period of time in which the taxpayer had been deemed as a “foreign resident”):
• Tax exemption for a period of 10 years as of the date of return to Israel on income generated outside of Israel from all revenue sources (both income from labor, occupation or the sale of assets).
• Subject to the terms of the Israeli Income Tax Ordinance, veteran returning residents (over 10 years abroad) are entitled to a one-year adjustment period as of the date of return before being defined as residents for tax purposes.
Meaning, the returning Israeli resident can change his/her decision to return over a year period from the date of their return to Israel, and simply go back abroad, whether to the country in which they resided before or to another country, without being considered as a resident of Israel during the period in which they lived in Israel (until the end of the adjustment year).
• Foreign companies that operate abroad, owned by a returning resident or a veteran returning resident shall not be considered residents of Israel and shall not be subject to tax in Israel, even in the event its management operates from Israel.
• The tax rate in Israel on pensions received from other countries shall not exceed the tax rate that would have been paid in the foreign country, had the pension been taxed in the foreign country.
According to the published plan, should it be exercised, returning residents that resided abroad for fewer than 10 years will be eligible for tax exemption on the options and/or assets they accumulated abroad, thus significantly reducing the period mandated by law, from 10 or six years to only one year, acting as another incentive for their early return.
Is the need for hi-tech staff really this substantial? Am I, the hi-tech expert living abroad, needed this badly?
Yes. According to the report on the human capital in the hi-tech industry for 2020 issued by the Innovation Authority, during that year, the number of employees in the Israeli hi-tech sector was approximately 334,000.
Today, the estimates in the labor market indicate that the number had already exceeded the 350,000 mark. And yet, a significant amount of employees is missing, a shortage that can be seen by everyone, due to the multitude of publications by hi-tech companies promising alluring working terms to appropriate candidates.
I am hesitating whether to return or not. What is the validity of the tax benefits?
The tax benefits have not yet been officially approved. However, in an attempt to expedite the return to Israel of hi-tech experts who live abroad, it is expected that the various tax benefits, which shall be formalized under a process of short-term legislation (which will expire after a short period of time), are expected to be valid for approximately two years. Therefore, those thinking of returning – should reach a decision within a reasonable time period.
And what about the options/shares I currently own, which were granted by the company I work for abroad?
Granting of equity-based rewards to employees (for example, granting of options or blocked shares of the company or of an affiliated company), is a common practice in the hi-tech sector. It is aimed to reduce the burden on the company’s cash flow on the one hand, by granting a reward instead of a salary increase, while enhancing the employee’s commitment to the company’s success on the other.
The blocked options/shares are usually granted at a low-par value and after a pre-defined “maturation period.” Employees are entitled to convert them into the company’s (or the affiliated company’s) shares at a price lower than the market price, and then sell them (hopefully) at a profit.
As part of the plan’s tax benefits, a tax exemption should apply on options/shares accumulated by the employee during his/her stay abroad.
I have options/shares from the period I worked in Israel, before relocating abroad. What happens in this case?
When an employee receives options/shares while he/she is an Israeli resident, and they later immigrate to a foreign country, while keeping the options/shares, a complex calculation applies to the proportional part of the profit that is attributed to their Israeli residency period, so part of their capital gains are taxable in Israel.
In such an event, this requires a more complex calculation, and it is recommended to seek expert advice.
Please note, that a “Green Track” is proposed as part of the state’s plan, which aims to create an incentive for the return of hi-tech experts, through offering certainty and preventing the need for complex tax calculations.
This track offers two paths, which address the conduct in relation to the options granted to employees during their work period in Israel (prior to their departure), as well as at the time of their return, should they choose to do so.
1. The first scenario – the options are fully vested prior to the departure of Israel: if the options had vested while the recipient is an Israeli resident, they shall be deemed as a sale of an asset in Israel – and the capital gains will be taxable in Israel.
2. The second scenario – the options are vested after the departure of Israel: the profits that were generated from the part that vested after the relocation abroad shall not be taxable in Israel (subject to discontinuation of residency abroad).
Is the plan relevant only for returning residents? What about new immigrants who are hi-tech employees? Are they also eligible for the benefits?
The tax benefits to be granted as part of the plan are not limited to Israelis who left the country, but offered to anyone eligible for benefits under the Law of Return. In fact, the plan can be considered as a type of “public appeal” for Jews living in the Diaspora to return or immigrate to the State of Israel, and take part in the Israeli hi-tech market.
By the way, new immigrants who are eligible under the Law of Return will also receive double tax credits as new immigrants. Israeli residents are eligible for tax credits from the Tax Authority, which reduces their tax burden. The basic eligibility is 2.25 points for each resident, with the value of each point as of 2021 being NIS 218 per month and NIS 2,616 per year. The benefit, as stated by the ministers in the new plan, actually offers “double” tax credit points eligibility compared to a “regular Israeli resident.”
At the end of the two-year period for those newcomers to Israel, if they choose to immigrate and meet the terms of the Law of Return, they will be able to choose whether they wish to become Israeli residents or return to their country of origin, thereby not being deemed as a resident during their stay in the country.
When will the plan take effect?
After the completion of the plan’s legislation process by the Knesset as required, the Tax Authority will publish directives for its implementation.
And the bottom line: How viable is it for me to return to Israel?
This is a very personal and private decision. It is important to remember that the process of returning to Israel entails not only tax benefits, but also an abundance of substantial considerations and a multitude of additional costs: expenses on temporary and permanent residence, expenses on transportation of household items, acquisition of new household items, extensive traveling expenses (for pre-return preparations), finding suitable schools and educational solutions for children and so on.
Those who were inclined to return to Israel anyway, will probably be especially incentivized to return to Israel.
And a small tip for those drafting their plans: recognition of the relocation expenses may serve as a significant incentive for the hi-tech talents who are considering returning to Israel. When the intention is to “draw” as many hi-tech talents as possible back to Israel, it is advisable to take this also into account.
The writers are tax experts at Doron, Tikotzky, Kantor, Gutman, Ness, Amit Gross and Co.