All right. So, streaming has begun and what I will do is I'm going to let, Ariel just stepped away. So, I'll give him some time to come back. Okay. You're back. So, everyone is going to be coming in now.
All right, good evening. Good afternoon. Good morning. Depending on what part of the world you're at. Thanks for joining us on HTJ.TAX livestream. What I'm going to do is I'm going to mute everyone, but once we get to the Q and A part, feel free to unmute yourself. So, you can ask your questions. Otherwise, you can punch your questions in the box below. So, thank you for joining us again. My name is Derren and Ariel, and I will be talking about US Israel taxes.
So, what's your kind permission, or please know that this is being recorded. So, if you do not want your image to be captured, please keep your camera switched off. Thank you. So, with that, I'm going to share my screen and jump right in. Okay, great. So, as I mention, so my name is Derren. I'm a partner, my firm is a part of a practice called Moores Rowland Asia Pacific. And I have been based in Singapore since 2013. We're also a member of a network of firms called Fusion International, which is how and Ariel’s team and ourselves are connected.
So, whereas Moores Rowland is based in Asia. Fusion has a strong presence, not just in Israel, but across Europe as well. So we get that Europe exposure and that expertise when tax matters require European expertise. So now, because I'm US qualified, you know how it goes, I'm required to say that nothing we discuss here should be construed as advice. We are having a general conversation about general tax principles. If you need to understand the implications for yourself specifically, and you want to take action based on advice, you need to retain your own tax team.
So, I may be a tax consultant, but I'm not your tax consultant. So, this is more or less an educational or for some people it's an entertainment piece. So again, we're not giving advice. I just want to make that clear so that that's how we stay out of trouble. Nothing here should be construed as encouraging you to pay less than your fair share of taxes in any jurisdiction in which you are exposed.
So, I always start off with these two pictures as a cautionary tale. When people say that, oh, you know, when it comes to you as taxes, once I'm international, once I'm outside of the US, no one's going to bother me. But these are two cases that happened kind of recently, which drive home the point that the IRS does have very long reach. So, we can, we can get into that later if, if someone wants to hear about our cautionary tale, but it's, it's a reminder to stay on the right side of the IRS. That the point. So how are we going to approach this? I'm going to talk about citizenship-based taxation, a bit of FATCA, and what your responsibilities are as someone who is US exposed and who is outside of the US, and we'll touch on stimulus payment, as well as President Biden. And without further ado, I'm just going to jump right in.
So, citizenship-based taxation, you know, everyone points fingers, and laughs the US because of the fact that you cannot surrender your tax residency without giving up your passport or a green card. But what we see increasingly, it's more of an FYI that there are other jurisdictions that are following suit, depending on if you have senior European passport. So even in some cases, Singapore, when you are, even if you're working outside of your country of origin, under certain circumstances, they are claw back rules. There's a fallback rule, which means that you would still be taxed.
So, in a way, citizenship-based taxation from a US perspective is definitely here to stay. But other jurisdictions are taking notes and maybe following as well. People ask me, well, you know, what am outside of the U S how does the rest of the US government know what I'm doing? That's impossible, right? Wrong and the reason why it's impossible is because of something called FATCA, which is a Foreign Account Tax Compliance Act. Some people believe, or they misunderstand, and they think it's a tax, but no, it is not as a freedom of information exchange. So that's my way of responding to the question that people would post. How is it that the US government knows what you're doing outside of the US? This is how FATCA empowered the US government from 2011 to sign bilateral agreements with countries all over the world and countries that you would not expect to have signed like China or Russia, they've all signed. And what they've agreed to do is waived their domestic bank, secrecy rules, and therefore every financial institution within the borders are legally required to go through their accounts and flag anyone that they suspect to be US exposed. And when I say suspect, many of us are, you know, I do. I'm sure many of you do you have multiple passports, you'd go in, and you use your other passport to open an account. The financial institution is required to do due diligence and look for certain indicia that suggest, even though you deny it, you may be US exposed. So, the point is that you will be reported to the IRS directly by financial institutions across the world because of FATCA. This framework for information exchange.
US persons, what do I mean by US persons? Well, obviously, you know, section 7701 citizens, permanent residents, AKA green card holders, but also people who trigger substantial presence by virtue of being in the US more than a certain number of days, which has a kind of odd calculation. But we can get into that if that is of interest as well. Now, those are the obvious ones. What I want to draw some attention to would be what we call accidental Americans. And what do we mean by that? If even though you may be born outside of the US, if one, at least one of your parents. So definitely both, but if one of your parents is US exposed themselves, their US citizen, you could be a US citizen, even though your birth was not registered with the embassy, and you don't have a social, you don't have a US passport, and you can still be a US citizen according to the law. So that's something you should be aware of. And that's an increasingly part of our practice, dealing with people who did not know that their US exposed and helping them catch up with some back filings.
Now, this is an odd one. And you may ask, well, why would someone who is not an RA stands for non-resident alien? If someone is US exposed and they're married to a non-American spouse, why would they elect to be treated as a US person for tax purposes? You may think that makes zero sense, but there are cases when it makes a lot of sense, and we can get into that. If anyone wants to take a deeper dive into it. But the point is there is an election that allows you to file jointly with your non-US spouse. If it makes sense for you guys, as a couple responsibilities are the US persons. Obviously, you need to file and pay taxes, but the it's not, I mean, one thing that I try to communicate is that, and we'll get into more detail in a slide or two down, is that when it comes to international taxes, the emphasis is a necessarily on just paying the IRS and the US government in general, they have a very keen to understand what you are doing outside of the US.
So, reporting of investments and reporting of foreign financial assets is super important. And in fact, counter-intuitively. The penalties for not declaring certain assets can be more than a penalties for not filing a tax return. That's to show, you know, the way that the US sees that in fact, for not reporting certain financial assets, the penalties can not only be civil, but they can be criminal as well.
Now, this is an acronym that we use to help people who are doing who one expert, an ex-pat for the first time. So, they, for the first time they're outside of the US, and they have to file and pay taxes as an American who is outside of the US. And what we ask you to do is do your best. So, B stands for bank accounts, but when I say bank, I mean, financial accounts, unit trusts, mutual funds, certain pensions, and retirement accounts, which are actually mutual funds in a wrapper. So, any financial investment outside of the US chances are, it may be reportable. So, to speak to your tax consultants. So, B bank accounts, E estimated taxes. So, when you in the US, and you get paid on a W2 as a salaried employee, there's with hauling at source right? So, you get paid net of what your taxes would be. That's because the IRS really likes to get paid along the way. They don't like to wait until the following year to get. So, they don't want to wait until 2022 to get paid for 2021. So, if it is that you're earning money without withholding. So, there's no withholding, and your employer is not remitting taxes directed to the IRS. That is your responsibility. So, it's your responsibility to work with your chosen tax professional, calculate what your estimated tax liability should be for 2021, and make sure it's remitted to the IRS, and you can pay online. And it's super easy to do so.
S state returns. So, this one is easily forgotten. I think, what do I mean by state returns? Most states are novice Salah states, which means that under certain circumstances, even though you have been working outside of the state, working in Israel, working outside of the U S for the entire year, and these certain circumstances, you can still be considered a resident in the state for tax purposes, and the state can still expect to tax return. So, then you're going to tell me, well, you know, I'm not in the state anyway, what are they going to do to me? I am glad you asked that because we've had many clients that at some point in time, they returned to live in the us and the IRS. The federal government talks to the state franchise tax board. They communicate back and forth.
So, when you're back in the US and you get a letter with a huge tax bill, which is accumulated taxes all those years that you were in Israel. Are you outside of the US so it's also important? It's a while I say, yes, it's important to stay on the right side of the IRS, it is also important to stay on the right side of your state franchise tax board, pay your state taxes or work with a tax professional to properly severed ties with your state. When you leave the US it's not sufficient to just pack up, sell everything and leave. You must take certain deliberate actions to sever ties with your state.
Last but not least transfer taxes, also easily forgotten, or just misunderstood the US taxes, not just on income, but on transfers as well. So, if it is that you're giving a gift to someone else that made at least trigger a reporting requirement. And when I say report, you just fill out a form of certain form, and you report that you've given a gift to someone. Failure to do so many results in a penalty of up to 30% of the unreported gift. So, it's not necessarily a tax calculation. It's simply reporting requirement. You're making gifts report them. You are receiving gifts from non-Americans. You, you know, you have a business partner, you have a fiancé spouse, boyfriend, girlfriend, and you’re receiving, or giving gifts, check with your tax consultant to see whether that is reportable.
And then of course, we have a state taxes, which I know it's a bit of a morbid topic, but estate planning is super important, and you don't want to leave an unnecessary burden to your loved ones when you, when you, if, and when you do pass. So please consider estate planning as well. So do your best B stands for bank accounts, including other financial accounts, estimated taxes, make sure the payment, state taxes, transfer taxes all important last year, including earlier this year, they have been stimulus payments. If you should have received them by now, obviously, if you did not, you can claim them in your tax returns.
If you have not filed your tax returns, yet you could claim them if you did file, but did not claim you can file an amended return to, to claim those credits as recovery bay credits. If you did not get the tobacco, you didn't get a debit card or whatever from the IRS, or you didn't get the direct deposit into your account. So, work with your tax professional to make sure that that is or handled correctly for those many of our clients are higher income earners. So, I always have to let them know because then they, you know, they WhatsApp the, the email, they call me, hey, where's my free money. And I have to explain to them that they have phase outs. So, when your earnings above a certain threshold, you no longer qualify for those stimulus payments.
So, if you have not got them yet, do check to see whether it's because, you know, it's a price of your success you're in too much. So, you don't qualify for them. Okay. The IRS has spent a lot of time and they've done a pretty good job at keeping the certain parts of the stimulus payment section of their website up to date. So, if you didn't get it, if you have any questions, a great FAQ's, you can update your address. You can do lots of stuff. Check out the IRS website. That's irs.gov. IRS.gov.
Some people mistakenly believe, hey, I'm outside of the US I make less than a hundred grand. Therefore, I do not need to file us taxes. I think we made it clear earlier on that the US tax you on your worldwide income. So even though you outside of the US, you still required to file and pay taxes. And the threshold for filing is actually pretty low. So, for example, you're married, filing separately, the threshold is actually $5. If you made more than $5, a tax return is due. So please check with your tax professional before you assume that you don't need to file a tax return. There's a lot of discussion, obviously right now, because of President Biden's tax plans. It is pretty detailed, especially on the international side, but just like a snapshot for those earning over 400K, you're going to see some extra social security or payroll taxes on your earnings above 400 K, for those of you who has C Corps, you're going to see, potentially, potentially everything, nothing has been decided as yet, but potentially what we're looking at is an increase in corporate tax rates from 21 to 28%, for those who are, who have structures and low tax jurisdictions because Israel is not particularly a low tax jurisdiction. There are low jurisdictions like Hong Kong, Singapore, BVI, Cayman, and so on, or even no tax jurisdictions like the UAE, Dubai, and you will be familiar with the global intangible, low tax income tax. So GILTY was one of the anti-deferral or taxes that meant to incentivize companies to bring stuff back on shore. Well, that tax is actually going to go up. So, this is something for those who have certain corporate structured. Otherwise, it's not an interest to you. There's a lot of buzz as well around the child tax credits and dependence credits. Yes, that's a thing, it's happening right now. But if you reside outside of the US, you may not qualify. So again, speak to your tax professional about that. If you reside in the US yes. Again, there's a lot being discussed, but until it's actually passed in both houses and signed off by the president, they're just discussions no real as to when it would happen, if it is going to happen, we guesstimate by the end of the year or so probably before next year when you'd probably be looking, getting into midterms and stuff like that.
So, that's where I'm going to pause there. I do have some other slides just in case people are asking about it, but what I'll do is I'll stop there, and I'll hand over to Ariel who will talk about Israel.
Thank you. And thank you very much. And let me just talk on my side. So, hello everyone. My name is Ariel Katz from Katz and Co, which is a CPA office in Israel. We offices, both in Jerusalem, the capital and in Telaviv.
A bit about our office and about myself, it was established in 1987. We went more of the best films in Israel on one hand or not small on the other end were not too big, meaning that we are a being like a one stop shop for any accounting audit or tax issue on one hand. And again, on the other hand, if clients are not getting lost here, meaning that the owner is taken care by the partners, not only by juniors a bit about myself, as I said already, I am an accountant and tax lawyer. I am teaching in the university, also in the ADC. They have a gold medal from the Israeli institution, and I built in the press regularly. So, after this first, there are two topics I wanted to discuss today with you guys. First one is talking about the benefits for first-time Israeli tax residents and the returning residents. And the second part would be just discussing some Israeli and US tax issues. Please do feel free that if you have that something that is not just want to ask doing my presentation, please feel free to stop me. And we'll also have a Q and A in the end.
So, the first topic is the benefits for first time Israeli tax residents and returning residents. We have two types of them, one is regular tax residents, and the other one is veteran within us. And that is someone that's been outside of Israel at least six years. That is, one being outside of Israel for at least 10 years. And in addition to, I'm sorry, can you hear me? The veteran ones, in addition to, first time in it, doesn't then benefit for 10 years of complete exemptions for both decks and reporting under a non-Israeli sourced income. And it's very important to understand what the non- Israeli source income is, because if you're sitting in Israel and you will see the salary, this is a will not be exempt since you've the place, the income plus for which you generate income in respect to salary is the best for which you're doing the work. Also, the same with business saving dividends for civic interest or receiving rental income from Israel, all of these will be completely exempt and therefore it's important to a consultant and to get a good advice on how to structure your income.
Because if, for example, you plan to move to Israel and you have a foreign company, it would be better to receive the income from this foreign company as a dividend, which would be exempt completely in Israel. And notice the salary would be, will be completely text in Israel. There is also an option for a adaptation or condition here, meaning a year that you can decide whether you want to build garden as an Israeli takes less than donut. This is only for the first year. When you have to use land, you have the opportunity to request another position year, and then you have another year to decide. And another thing that eh, is especially important to consult about is the end of period tax planning, people that already been in Israel for eight or nine years, and they are one or two years before the end of the tax benefit, it's very bad. One or two to consult and get getting advice on that. Since some actions that you may do before the end of the tenuous period can save you a lot, a lot of money. Eh, so this is all I want to, to present about the benefits. And now I want to discuss shortly, unless anyone who will have a specific word about some Israeli and US specific succession issues that we deal here and people that are both resident and US tax resident, should think about, first of all, there's the issue of tax burden.
That's usually the mechanism is that if you make an income and it's from the US, US should be the one that is taxing you first, and Israel should tax you after. In most cases, this works a very good this mechanism, and it's not no problem. However, in specific cases, eh, when you sit in one place and make an input for the other place, then there can be a problem with this mechanism. And then give an example if it sits in Israel and you are an employee in a company, and you will receive a W2, probably a use company, with all the tax, since they think that US should have the first bite, however, under Israeli law easily, I should have the first bite of this income and he will probably have to file a tax return and of course a refund.
Another issue I want to discuss is the double taxation with respect to NSC, which is the Israeli National Security, not like income tax, when we have a mechanism that says it takes credit with respect to national security, there is no such mechanism. This means that every US expert that is an Israeli self-employed is probably having a tax resident since he has to pay, he or she have to pay both Israeli and US national security with no option to get credit for man against the, another of course we have solutions for that. Once the solution is to operate via an Israeli company and not as a self-employed as an offset move, share what the goal here in Israel, or separate to another issue with respect to us, Israeli taxation is an employee’s options. The issue is arising since, eh, under us law taxation law options, text, eh, with respect to the vesting period. However, under the easily takes over to your opinion, it should be text on a case, a cash basis.
This means, for example, if we worked in the us for three years and then came to Israel for the last a year, and you have a vesting period of four years, for example, then us will want to text you on three out of the four years of the vestibule. But if we want to text you on the phone, a, on the four income you generated since you received the cash amount, when you want Israel. So, this is also something that is better to consult before a moving from Israel to the US or moving back.
If you have an option as an employee, eh, eh, with big amounts. And another thing I want to discuss is how you became an Israeli tax resident. I mean, not like in the U S system. As I mentioned before that it was easy to become a US tax person, and it's quite hard to become a new non us latex person. It is a demand, a demand, a thing we need to check is the center of life. The main test is the sense of life test. This means that if your center of life is in Israel, you're an Israeli text. If it's outside of Israel, you are not a belong a site of this set of five tests. We have a number of tests that can help us. And this test basically means if you are above dealing in Israel, you're probably an Israeli tax resident. And if you have been in Israel in the last few, eh, most than more than 400 twenty-five days, and in the specific 10 specific tech seals being in Israel, more than 30 days, you again, will be properly and easily takes the resident. However, in some cases, even if you do meet these 10 years of being an Israeli tax resident, you can be guarded as a non-resident. Again, if we go back to the center of life tests in our office, usually a white texts opinion in these issues, to take a position that people are or not Israeli residents.
Another issue I want to discuss briefly is the issues of investing in a foreign company from both sides. For example, Israeli people investing in us companies or us Belsen invest in Israeli companies. When a non-Israeli person invest in an Israeli company. If you received a dividend easel will text him between 25 to 30%. However, if he received a capital gain, meaning he buys it, shares the company, and sell it afterward, he will usually not be taxed at all in Israel. For the other side, an Israeli person making an investment in an Israeli company is fully texting Israel. And of course, he will see the credit on the tax not in Israel, in other Israeli US taxation issue is inheritance tax. As a seal, most of the people here in the will now, when a person died, if he is a US person, or if he has US assets, he is exposed to US inheritance tax. And even if he's not an US tax person in this respect, the bracket for which your tax, if you are not US, that's person is quite low. It's something around $60,000 can correct me if I'm not saying the right number, but this means if you're an easily tax person, you've never been in the US and not in person. And you, for example, if a US real estate, what $100,000, not such a big amount, if this person passed away, you'd be subject to US. And also, here are some ways to play in your Texas using this other company, use trust for this advancement a oh, of course, buy, buy a life insurance that will cover the tax that we need to be paid.
When the person passed away, the issue of management from Israel, it's important to know that with respect to non-Israeli companies, under Israeli law, if a non-Israeli company is managed from Israel, meaning the management is sitting in Israel and shareholders are sitting in Israel this company is also regarded as an Israeli company, meaning that this combination with taxes is on its worldwide income. This means that an Israeli person easily takes resident that blend to invest or established in non-Israeli company and US company, for example, to be fully aware of this issue. And in some cases, it will be smart to a point, if it's a big company with bigger avenues to appoint a manager, or to have a non-Israeli shareholder or to take into account that Israeli tax authority. We won't bite from the same form. I want to discuss, how to deal with US LLC and the succession of exempt is an info with respect to US LLC, which many, many Israelis are investing in US LLC. We have the problem that, most of this LLC, not all, but most of them electing to be regarded in the US as a transparent entity. The transparent entity means that this LLC is not paying the tax, but the tax you use, I mean the income and the tax is paid by the shareholder. The problem is that under Israeli law, these companies usually should not be regarded as a regular company. And then therefore there is a problem that Israel may want to text the company while in the US is on the person.
So, the idea came some years ago with kind of a solution, and it's a partial solution, not a fully solution. And I would expect their party, or the solution said that also in Israel will be partly regarding the you are stopping him is the transparent. Why I'm saying partly because if it's only one company, okay, the income will be moving up to the shareholder and you have to be tax and the shareholder will be tax in Israel. However, it's not a fully solution since the ITA say that, for example, you cannot offset the income with the loss of another. So, for example, if you have two US LLCs, one making $100 and the other one is losing $100 US. under US regime, and you can offset the income I see with the profits of another policy, and you will pay zero tax. However, in Israel, you cannot upset under the ITA position. At least you cannot offset the income of one US LLC, with the loss of another meaning in Israel, you will prepay tax for the one that make the profit in Israel. And he will have zero credit for the US. Since you paid zero tax, this will lead eventually to a double succession problem. And therefore, for people that are making investments in the S it would be usually smart to, or making all the investments via wireless, all those different structures, such a limited partnership, or any other, a structure that can resolve this problem. The last topic I want to discuss is the succession of Israel in many types of exempt incomes.
For example, some of the real estate that people sell here in Israel is the completely accepting income. Income from it is several funds such as what are you calling is in pension funds are usually exempt. However, some of these investing vehicles are not exempt in the US and therefore US persons are sometimes getting into tax accident. Sometimes getting into tax accident when they're making Israel full exempt from tax transaction, and when they have to pay tax on that in the US for example, if they sell a real estate sometimes, they don’t have to pay any tax in the US. And also, with respect to this point is to be smart to consult before making a big transaction and to think about all your tax structure, both with your Israeli tax advisor and your US tax advisor. So, this is basically, I hope you got some points to think about and follow to discuss, and you learn in some issues in this webinar and about tax return and to see if anyone has any questions they want to speak about.
All right, thank you for that Ariel. So, we did get some questions in advance and thanks to those who did submit. Some people are not looking at us are not joining us on zoom, they are on other platforms. So, because of that, I'll read it in advance. And then most of them are for Ariel and a few would involve the US position, which is me as well. So, I will start at the top. My assets and income in in the US dollars, but I'm resident in Israel, which is considered my tax home. What is the best way to invest and save for retirement in US and in brackets, what kind of investments, retirement accounts, are more beneficial while shielding me as much as possible from Israeli tax, Ariel?
Yeah. So, if I understood correctly, the question, we have a person that have his money in the US, and he wants to save some kind of a pension with lower tax Israeli brackets. For Israeli person that have income, which is some kind of a pension they're receiving from not Israeli source with a 35-exempt amount. I mean, 35% of the income will be exempt in Israel. The other amounts will be taxed under Israeli, regular records. I mean, starting from zero and up to 50% depends on the total income. I'm not sure what to speak to this question, how much flexibility we currently have with respect to this fund, if this amount can be moved to somewhere else, but receiving a 35% exempt on this is a quite good. And I am not sure we have we'll have something better to do with these monies.
Okay. So, 35% exemption is probably the best someone can hope for understood.
Next question for the long-term, would it be better to consider moving investment dollars into shackles and investing even there's Israeli stock market or real estate in Israel? Arielle?
I mean, again, the money is in the US dollars. So first we have the question or the bottom of the US and Israeli exchange rate, since it's the last four or five years, if you move from one year to another, the US rate against the shackles, the shackles are going down, it was a 3.9. It became 3.1, about half year ago, 3.13. And now it's around 3.25. And it's important to know that this loss, I mean, if you're a person you're not a company and you have US dollars, you have $1 million, five years ago, it was 4.9 million shackles and now it's 4.2, five million shackles and you lost more than half million shackles. This loss is not a deductible from anything. You cannot use this loss and it will go down. You will invest in US dollars will go up. We would pay zero tax on that. It would be fully exempt, this income. So, this is one question, and unfortunately, I cannot forecast what will the future exchange rate? So, I cannot give any advice on that. Israeli state that he wants the US to be around 3.2, 3.3, at least, but we saw the best that they not always succeed in debt. So, this, I don't have too much smarting to advise with respect to the investment, under Israeli regime, you would be paying the same tax on both investment in Israeli companies or US companies, dividends tax and the capital gains tax would be the same from Israeli point of view. This means that if you are not paying in the US more tax, then you should spend basically what the same investment in Israeli stock exchange or US. Of course, in most of the cases where specific ventures cases of like the NGLs law, meaning that if you invest in Israeli startup, you can receive some deduction, but the general no, it's quite the same.
Yeah. And then it's kind of like, it's hard to paint with a broad brush. You know, everybody's situation is different. It depends on the nature of the investment. Certain sectors may outperform other sectors, you know, and it's not necessarily a tax question only, there's investor appetite as well. So, it's perhaps helpful if this person would sit with a financial advisor as well as a tax advisor, but definitely get a financial advisor involved.
So next question, should I reconsider the long-term building up of a Roth IRA and with regards to Israeli taxes?
Can you say again, I'm not sure I understood?
So, the person is asking, should I reconsider the long-term I guess I'll rephrase that the long-term and long-term investments in Roth IRAs with regards to Israeli taxes. So just for those who may be listening and don't get the nuances, basically speaking in the US retirement accounts in one of two categories, I know I'm being very, very broad in this discussion. So, there are those which are entirely deductible upfront. So, you reduce your taxable income by what you put in like a 401k, but on the, on the tail end, when you do get a distribution after you retire, it will be subject to taxes when you're pulling it out, right? Then there are those which aren't, which are where you are paying the taxes now. So, like a Roth IRA. So, you're paying the taxes, you're putting them in. So, it's after-tax money, but when you pull it out later on, it would normally be tax-free when you pull it out of retirement. So, the person is asking about the Roth IRA, which is after tax money, normally from a US perspective, and the person is asking, what are your views from an Israel perspective, Ariel?
Okay. So, from Israel perspective, it will be not tax exempt. I mean, if we want partly, what Israeli is doing is, what is the money before it’s invested and how much money is taken out? And the difference between them would be probably tax. So again, we may be able to receive 35 exemptions on all this income, but the rest will be taxed, since Israel is not a familiar from the Israel tax authority investment vehicle.
Understood, understood, and just a little commentary from a US perspective, of course, given that we're in a situation where it is quite likely that we'd see an increase in taxes in the US. People tend to be leaning towards investment decisions, which mean that they pay taxes now, when it's low, as opposed to paying taxes later on, when chances are it's going to be higher. So that's, you know, that's one of the considerations.
Next question. Would it be worthwhile to consider changing my residency status to the US specifically, California, where my job is? Would it be worthwhile considered changing my residency status to the US, so I'm not sure whether the person means, well, let's assume that the person means shifting from Israel to the US from a tax perspective, I guess. So perhaps eliminating the Israel tax residency in favor of the US, that’s my interpretation. Ariel what are your thoughts?
When a person leaves Israel, basically we have in Israel, what you call an exit tax. Back to all of all of his assets, and it's not only Israeli assets, but also assets he held outside. But with respect to his ordinary income, I mean, salary business income, rental income, not capital. Again, once you stopped being in Israel tax resident, he will not be tax in Israel at all. They said before, in order to stop being in Israeli residence, usually the ITA looked at a period of, at least 3 years. I mean, if you leave Israel and come back after one year, it's a sure that all of the period they will consider Israeli tax resident. If you leave for a year, it’s the same, if you live for three years, we are quite in the gray area. But if you live for four years, you are in the safe zone of being a non-Israeli for all of these 4 years period. So, until two years, it's clear, 3 years it's the gray zone and the four years you're on the safe zone. And if you are outside of Israel, for four years, all your income that you generated outside of Israel in this period will not be taxed.
Next question. Are donations, even ones below the amount of the standard deduction in the US counted for Israeli tax purposes, Ariel?
So, the answer is no, because under Israeli law, only a donation for NGO that are recognized by the Israeli tax authorities and received specific certificate under 46 section of the Israeli ordinance, tax ordinance received. If you only donate it to them, you will receive back the tax credit, 35%. So, donation for non-Israeli institutions in most cases will be entitled to receive the credit. There are some institutions that they have, like an Israeli branch or an Israeli, subsidiary, or something like that. And then they will probably tell you, okay, you will move the money for this branch or this subsidiary. And then you can receive the credit, but just for a regular US institution, the answer is no.
Next question. I hear that Israel taxes residents, and worldwide income. I understand that as a resident, that the salary interest investment generated within Israel will be taxed. But what about capital gains, for example, from the US or income generated in the US I know you mentioned this in your presentation, but just to emphasize, Ariel?
Yeah. Its fully tax Israel and the same if you’re Israeli tax resident. So is it that if you have a capital gains from the US, if you have a salary from US company, business in the US, anything, you have to file taxes in Israel. Otherwise, it's a criminal offense.
Okay. Understood. Now, when you did the slide and you spoke about the LLC problem. You mentioned two issues, one that there was no offset. So, for example, if one LLC is making money and one is making a loss, you kind of said the loss against the income of the other LLC. Right? What was the other problem you mentioned, please?
The first problem is basically, so this problem that under US law, it's usually not always, if the person checks the box, is it a separate entity under reasonably law non-Israeli companies usually cannot be transparent, but because so many Israel made investment in LLC, the Israel tax authority published a paper said that they fixed or solved this problem. But again, it's just partly fixed because if you have one, let's see you probably okay. If you have more than one, LLC, sometimes your problem is not solved.
Okay. So, it's partly fixed. Okay. Yep. Does it make a difference whether as you, as you are now, I'm tying this back to the slide that you have before, whether management. So, whether the management in control is exercise from Israel or from within the US, because if there's no substance in the US that makes a huge difference, correct?
Yes. If the company is managing control from Israel, under Israeli law regardless of if it’s a company, which means that Israel will want the first bite of the income, and of course, US will also want this US company first to form its income, then we'll have a problem. Back to passive companies. I mean, company, for example, that just people buy an asset and have rental income from this LLC. It's not just a use problem because, eh, the ITA, these authorities usually let you have to use credit. They understand it's not like a real company that someone actually manage. It's quite an investment vehicle. However, if it is active, for example, if an Israeli people operates from Israel, but established US company, for example, because they think it will be easier to go into the US market with this company. And you have like five or six employees here working from Israel. And the management is in Israel, and you have like one person walking from do the US, and it's not so highly ranked in this company. You are in a big problem of this management and control. And you will probably find yourself, with the IRS of mindsight and the ITA for the other side, both for your money. Of course, at the end, you can request what you call in Israel. Inhibits (inaudible) and in the US it's means I'm not sure of the word, but we can request the ITA and the IRS to speak with another, but it's quite costly and takes a lot of time to make this procedure. So, it's better not to get into this problem in the first place.
Okay. Understood and agreed.
We have another question that, sorry, I'm just reading them in the order in which I got them. As a US resident who owns a small company, can my company generate income in Israel without the hassle of paying taxes there? I think that's a self-explanatory, but Ariel?
Well, it depends on what you're doing. mean, you can be a very, very big US company or not US just not inside a company. Let's speak about a Google or Facebook making tons of money for advertising in Hebrew, in Israel, in Hebrew Israeli sites, paying zero tax in Israel. So it depends on what you're doing. If you have a services, a giving from Israel, yes, you will not be tax in Israel. But if you give services from Israeli permanent establishment, meaning they have someone in Israel that is signing a contract on their behalf, you will be texts. So, we need to be more specific and understand what exactly you're doing in order to answer this question.
Yeah. So again, another example, please do consult a tax professional. So, you can talk this through in detail, moving on. This is just a comment, or the person replied, it's a training, they give training. But again, sorry, I'm just saying, as Ariel mentioned, it depends on where, whether you have a permanent establishment, whether you have boots on the ground in Israel, you know, where is where decisions being made and so on and so forth. So, unfortunately, it's not possible to give a comprehensive answer here, but if you want to reach out to Ariel and his contact details, I think if you scroll up, if, if you scroll up and this chat box here on zoom, you should be able to get his contact details, and please do reach out to him. And you can have that explored in better detail than we can right now on our webinar.
Next question. Well, it's not really a question. Someone's making a comment, but the Israeli government is supporting the dollar. No, is it not?
They're trying to support the dollar. Yes. The Israeli bank is buying. I think it was 30 billion US dollars in this year's this to make the dollar go up, not quite succeeding. So, partly.
Okay. And next question. Okay. If you had investments before the 10 years, I guess, I mean the 10-year period in Israel, after which you will be taxed.
So, if you had an investment in IRAs, I guess a US retirement account a 401k, et cetera, how do Israeli taxes affect the American Israeli after the 10-year tax exempt period? Also, is it true that if you don't make $10,000 a month, you don't need to report. I'll just answer the second one first, before I hand it over to Ariel because you know, it's a common misunderstanding that I've seen in other spaces as well. They believe that if you make below $10,000 a month or maybe a hundred grand a year, you don't need to do US tax returns. And that's incorrect. You may not need to pay taxes because of tax credits or the foreign earned income exclusion, but a tax return is still due. And I think in one of the slides, I had it, if you make as little as $5, assuming that you file separately, the different thresholds or whatever, but the point is $5 could be the threshold for filing a tax return. See, you know, from a US perspective, please do seek professional advice on that. Ariel, do you want to comment on the rest?
Yes. I want just to explain the 10 years mechanism. The 10-year mechanism works that If you are in the US before, I mean, you are out of Israel and then come to Israel, if its ordinary income, regular income, let's call it that way. It's exempt only for these 10 years. I mean, if it's a salary, if it's a pension, a salary that you are receiving, even if it's a business income, this is exempt only for the 10 years. What is exempt after the 10 years is for example, capital gains. If you sell a real estate or sell a company or anything like that after the period of 10 years, it will be also partly exempt from a day that you buy the shares or the real estate. And until the day of the end of the 10 years, it will be the periods of exemption and the rest of the period will be taxable periods for.
So, for example, if you buy an asset your five years in the us, and then you come to Israel another 10 years and two years after that you are selling. So, we held the essence for 17 years out of it.15 out of 17 will be exempt. Two out of 17 will be tax exempt. So, with respect to this question, the question is about a IRA. So, it means that it will be an order and an income meaning after the 10 years, it will start to be fully texts in Israel, not fully in the sense that as I said before, 35% should be exempt, but this is not because you will in the 10-year period, but just on a regular Israeli tax law.
Okay, fantastic. We have a, quite a few more questions, but unfortunately, we can only do two more because we're coming to the top of the hour, but please we, we do this every six month or so. So, we will do this again and apologies for not being able to answer all the questions, but just two more for Ariel.
Is American social security income ever tax in Israel before or after the 10 years. I think you've answered this already, but to emphasize, Ariel?
Usually if it's a social security income, it's usually exempting Israel. I'm not wanting to say that all of the social security, but usually it's exempt, even after the 10 years period.
Okay. So even though after the 10 years, it is still exempt. Thank you. Usually. And the last question there is a 10-year exemption. First time is really tax residence, which you'd already discussed. What if you leave in the middle for four years, can you restart your 10-year exemption when you return four years later?
No. If you live in the middle of the 10-years, you have to be, again, at least six years to be a regular veteran irregular or 10 years veteran return. Go back to my point about the adaptation here. I mean, if you can answer any, you're not sure and you maybe go back, go back to Israel and then you can only on the first year request a year after that, you just losing your exemption. You would have to be again at least 10 years to be fully exempt for the next 10 years.
Okay. Fantastic. And on that note, thank you very much for attending Ariel. Thanks for sharing your time and your expertise. All right. And we, this is all being recorded, so it will be available on YouTube on Facebook or wherever you get your podcasts, apple iTunes, SoundCloud, everywhere.
So, thank you for joining. Please check us on HTJ.tax for more webinars like this, and we'll see you next time. Thank you.