10/30/2012 23:13–What happens when a manager of an international investment fund or hedge fund makes aliya to Israel? Will the fund and all its investors get swept into the Israeli tax net lock stock and barrel? This would cause a tax tsunami and deter people worldwide from investing in such funds. It would also deter immigration.

Over the years, the problem has arisen frequently and the Israel Tax Authority (ITA) has issued tax rulings protecting foreign investors of overseas funds from Israeli tax because of the huge amounts involved.

But Israeli tax law is unclear in this area and doubts remain. How much fund income is allocable to Israel? Are foreign investors and foreign managers in the fund protected from Israeli taxation? What about immigrants’ tax breaks? What about success fees? The ITA has just published a topical new tax ruling on “The Allocation of Income To New Immigrants Who Are Partners and Investment Managers In a Hedge Fund” (Ruling 4589/12). But deciphering the ruling requires special insights as discussed below.

The facts of the ruling

The ruling applicants were a group of non-Israeli resident partners in an international hedge-fund group who wanted to immigrate to Israel. They are said to be senior investment managers with broad experience and goodwill. They are going to work for an existing Israeli company in the group, which pays Israeli tax on its activities of “research and development and managing and executing investments on behalf of the group.”

They hold shares in a foreign company, the subject of the tax ruling, which derives a share of management fees and success fees from other entities and partnerships in the hedge-fund group around the world. The foreign company does not market or seek clients in Israel, nor provide services to clients in Israel, nor represent the group in Israel…Read More>>

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