Hi-tech workers abroad to receive tax benefits if they return to Israel

Israel announced new tax benefits for Israeli hi-tech workers living abroad – as well as workers entitled to immigrate to Israel under the Law of Return – on Tuesday via a statement by Israel’s Ministry of Innovation, Science and Technology.

Returning residents who left Israel over a year ago will not have to pay capital gains taxes on overseas earnings, will be able to deduct expenses associated with returning to Israel, and will have their income tax rate capped at 30% (as opposed to 47%) in the first year of their return, as well as 35% in their second year. These tax relief measures will be further extended to foreigners who are eligible to make “Aliyah” to Israel under the Law of Return.

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The new policy is aimed at solving a labor shortage in Israel’s burgeoning technology industry. The benefits will be valid for a period of approximately two years and lend a “significant boost” to Israel’s hi-tech sector, the ministry added.

Currently, only returning Israeli hi-tech workers who have been working overseas for a decade or longer are entitled to eschew taxes on capital gains and passive income earnings from overseas investments. Until now, returning Israelis tax rates were capped at the typical 47% and workers were not allowed to deduct moving expenses.

“This is another step out of a wide range of programs that I am promoting in response to the acute human power problem that the Israeli high-tech industry is experiencing, alongside all-time records,” Innovation Minister Orit Farkash-HaCohen said.

While Israel’s unemployment rate sits at around 8% per the Central Bureau of Statistics, technology companies are among Israel's largest employers, employing 334,000 people per a 2020 report by the Israel Innovation Authority and Start-Up Nation Central. Despite Israel’s hi-tech sector dominating employment nationwide, job openings have seen massive growth across the industry, with job openings rising 300% in the year 2021 alone.

The massive demand for jobs comes amid a record $15 billion of incoming investment into Israel’s hi-tech sector from January to August 2021 – 2020 saw a then-record $10.6 billion of investment. As investment has grown, however, labor force participation has declined, reaching a low as 60.50% in January 2021 amid the COVID-19 pandemic.

“During the past year, the high-tech industry broke records in raising capital, significantly increasing the need to recruit skilled workers, thus intensifying the problem of a chronic shortage of workers in the industry,” noted Dror Bin, CEO of the Israel Innovation Authority.

Israel has provided tax incentives in the past, most famously to those making aliyah to Israel. The Law of Return not only allows Jews the right to relocate to Israel and obtain Israeli citizenship, but also offers various tax breaks to encourage diaspora Jews to migrate to Israel. In 2017, Israel’s Ministry of Aliyah and Integration introduced tax exemptions on foreign income and assets, tax credits for new “Olim” – or immigrants entering via the Law of Return – and support and assistance for entrepreneurs.

Israel offers additional tax benefits to hi-tech companies, investors, and lenders, announcing a series of tax incentives last October to companies across the technology field.

“We see paramount importance in promoting the high-tech industry, which is the locomotive that leads the economy and a significant factor in its growth,” Finance Minister Avigdor Lieberman, who co-sponsored the initiative with Farkash-HaCohen, said.

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