Israeli Exit Tax – A Glance on Its Challenges, Mitigation Options, and New Expected Legislation

In recent years, many Israelis have been relocating from Israel to other countries. This trend is particularly prevalent in the tech industry, where international mobility is common. Such relocations involve various international tax considerations. In specific, many such relocations constitute “severance of residency” for tax purposes, which means that the individual ceases to be an Israel tax resident.

Upon severance of residency, Israeli tax law mandates the imposition of an “Exit Tax”. Under this mechanism, individuals are deemed to have sold all of their assets, though the tax payment can be deferred until the actual sale takes place. Moreover, the Exit Tax triggers a deemed capital tax event on the date of severance, which means that any “Real Capital Gain” should be taxed in Israel on the day of severance. For Exit Tax purposes, such Real Capital Gain (or loss) is multiplied by the ratio of the time spent in Israel to the total duration of ownership of the asset.

Based on the above, an individual who is relocating from Israel and ceases to be an Israeli tax resident shall be subject to exit tax. It should be noted that residency status is a complex issue that should be considered and analyzed before relocation. However, such exit tax may be mitigated by advanced tax planning. For example, such an individual may desire to sell assets with unrealized losses in order to minimize the exit tax liability for such assets. Also, such losses may be used to offset other capital gains in the same year.

It should be further noted that in many cases the exit tax liability results in potential double taxation upon the actual disposal, due to a lack of eligibility to credit such tax in the new country of residence. To mitigate such double taxation, in some cases, it is possible to establish a “family company” or form a trust. In the case of a “Reciprocating Country”, the provisions of the relevant tax treaty should be examined and may significantly benefit the individual in this regard.

Furthermore, the current exit tax provisions have many loopholes (tax on dividends, collecting issues, etc.). Therefore, the Israel Tax Authority has discussed a legislative amendment, which is expected to levy a significant burden on high-wealth individuals who are relocating from Israel. Asaf Leshem (founding partner) represented the Israeli Institute of Certified Public Accountants on a committee with the Israel Tax Authority, which suggested fundamental changes to the Israeli international tax regime, including the expected amendments to the exit tax regime.

The information contained in this article does not constitute legal or financial advice of any kind. If you are considering relocation or have questions about the tax implications involved, we invite you to reach out to our tax experts, who specialize in international taxation and relocation to provide tailored advice and assistance in making informed decisions that align with your financial goals.

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