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Tax on Foreign Earnings Seen As Blow to North American Aliyah

November 14, 2002
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It took Herb and Barbara Greenberg 10 years to realize their dream of making aliyah so they could live near their children and grandchildren.

But when a long-debated tax reform goes into effect in Israel on Jan. 1, they may have to consider leaving.

Many immigrants like the Greenbergs, former teachers who retired to Israel, came with the understanding that they would not have to pay Israeli taxes on income from their overseas assets. Like all American immigrants, the Greenbergs already pay U.S. taxes on that money.

That understanding will be reversed by the new tax law.

The revised tax law makes radical changes in the way immigrants’ overseas assets are treated, including passive income, pensions and income earned abroad.

“We’re living on a fixed income,” Herb Greenberg said. “We’re not talking about stock investments or passive income from real estate investments. We’re not talking about big money.”

The government’s beleaguered tax reform was first recommended in the autumn of 1999 by then-Prime Minister Ehud Barak. It proposed lowering income-tax rates while instituting a 25 percent tax on all profits made in the capital market.

For American immigrants — many of whom are retired and living on fixed incomes — it would involve paying taxes both here and abroad.

According to the Tax Reform Action Committee, an ad-hoc group of concerned immigrants, the tax implications will vary for immigrants from different countries.

For a retired American couple with $36,000 overseas dividend income, who pay $3,124 income taxes in the United States, the new law would force them to pay an additional $9,476 in Israel.

Besides the financial hardship, what angers many immigrants is the apparent contradiction between the reforms and Israeli Prime Minister Ariel Sharon’s repeated calls for a million new immigrants in the next decade.

Sharon has named immigration as one of his government’s top priorities and has emphasized the need to encourage immigration from the West.

“We believe that the prime minister is sincere in his desire to encourage more olim, particularly from Western countries,” said Marvin Silverman, national president of the Association of Americans and Canadians in Israel. “However, unless this tax legislation is amended, we are not only going to witness a dramatic drop in western aliyah but, worse yet, the division of families that came to be reunited in Israel.”

Dan Biron, executive director of the Israel Aliyah Center for North America, said he doesn’t think the tax changes will deter North American immigrants.

“They’re going on aliyah for ideological reasons,” Biron said. “They’re willing to contribute to the strength of the State of Israel.”

In fact, the government recently decided to up the immigration benefits offered to North American immigrants to match those offered to olim from distressed areas. The increased benefits will kick in Dec. 1, a month before the tax changes.

The roughly $8,000 starter package given to a family of four in its first year in Israel first was made available to immigrants from the former Soviet Union. It later was offered to immigrants from Ethiopia, and then to those from Argentina and France.

North American immigrants were believed to need less help, but the government changed its mind earlier this year.

In addition to the $8,000, immigrants receive free one-way tickets to Israel, rent subsidies or cheaper mortgage rates for five years, customs rights on imported goods for three years and free health insurance and Hebrew study for six months.

Some might say that the increased benefits — intended to give North Americans an incentive to make aliyah — and the tax changes are working at cross purposes. Not Biron, however.

“Compared to the benefit of what the State of Israel is providing to new immigrants,” the tax changes are negligible, he said. “It’s almost next to nothing.”

But the tax legislation certainly would affect the Greenbergs, who live in the Tel Aviv suburb of Ra’anana, near their daughter’s family.

“We give financial help to the kids,” said Greenberg, who has two married children and nine grandchildren in Israel. “A lot of young families come to us to help convince their parents to come here. And a lot of future olim from western countries will have to factor in whether to come if their parents can’t come.”

TRAC calls the legislation a “breach of contract” of government promises to olim who came to Israel with the understanding that they would not have to pay tax in Israel on the income from their overseas assets.

The group is seeking amendments to the new tax law, making the effective date for taxation of passive income either 10 years from the date of immigration or 10 years from the effective date of the law, whichever offers immigrants more time.

The committee also is seeking to broaden the definition of pensions to exempt all types of retirement income that retired immigrants receive from overseas.

The tax reform passed as a law in early 2002, meaning that the only way to change it is through amendments in the Knesset. The problem is, the Knesset will be out of session until after the Jan. 28 elections, and the new law is scheduled to go into effect Jan. 1.

If the amendments aren’t passed this week before the Knesset recesses, the process will have to begin from scratch when a new Knesset convenes later this winter.

Deputy Prime Minister Natan Sharansky, who heads the immigrant party Yisrael Ba’Aliyah, tried recently to add the two TRAC changes to a list of more than 30 amendments offered by Finance Minister Silvan Shalom, to no avail.

Shalom “thought it would open a Pandora’s box” and encourage other interest groups to propose their own changes to the law, said Eli Kazhdan, executive director of Yisrael Ba’Aliyah.

The Finance Ministry said it had no comment on the matter.

Yitzhak Heimowitz, an attorney and co-chair of the TRAC executive committee who has followed the issue since it was introduced in 1999, wasn’t surprised that Shalom took a “hard-nosed attitude” to the proposed amendments.

“Their attitude is not to concede anything until the very end, and then they concede very little,” he said. “The only way they can be overcome is politically.”

That is what happened two years ago, when the tax reform was almost passed. Then-Finance Minister Avraham Shochat agreed to delay Israeli taxes on new immigrants’ overseas assets for 10 years, and five years for veteran immigrants.

When Barak’s government collapsed, however, the tax bill was left in limbo.

The National Religious Party, Israel Our Home and the secular Shinui Party have joined Yisrael Ba’Aliyah in the tax reform battle. Kazhdan is hoping that Benjamin Netanyahu, the interim foreign minister who is running against Sharon in the Nov. 28 Likud Party primaries, will come on board.

“Yisrael Ba’Aliyah are fighting like the devil, but they’re not strong enough,” Heimowitz said. “The only one who’s strong enough is Arik Sharon, but he doesn’t seem to care.”

Sharon has “been off the radar screen” on the issue, agreed Kazhdan.

The Jewish Agency for Israel’s Board of Governors unanimously passed a resolution last week calling on Sharon to abolish the “anti-aliyah” taxes.

The agency has “a moral responsibility” to ensure that the immigrants it brings to Israel have a successful absorption, Jewish Agency chairman Sallai Meridor told JTA.

The TRAC team hoped the Board of Governors’ support would make Sharon “tell Silvan to straighten it out,” Heimowitz commented.

“It could still happen if he thinks he’s about to lose” the immigrants’ votes in the Likud primaries, Heimowitz said.

While Sharon hasn’t made any statements on the tax law, Netanyahu told TRAC that if elected prime minister he is committed to “immediately abolishing legislation that imposes tax in Israel on foreign source income of olim.”

Kazhdan said the changes would hurt both those who have immigrated to Israel and those considering aliyah.

“If five people make aliyah and 500 make yeridah” — that is, leave Israel — “then we’ve lost,” he said. “It’s not just about finances; it’s the message, it’s totally the wrong message. Not everyone coming from America comes with a million dollars.”

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