Date of payment of tax on leasing an apartment in Israel to the end of the year and the consequences on Israelis abroad

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The maximum rent for residential purposes exempt from tax in Israel stands today (2020) at NIS 5,100 per month. The tax-exempt amount relates to all income from leasing for residential purposes of an individual from all apartments owned by him.

If the income from rent for residential purposes exceeds the above exempt amount, the landlord is entitled to pay tax at a reduced rate of 10% on all income from rent, as from the first shekel without the possibility to deduct expenses.

Payment of tax at a rate of 10% will be carried out up to 30 days from the end of the tax year for which the income was received.

Non-payment of the tax on this date, cancels the entitlement to reduced tax at a rate of 10% and the obligation will apply to submit a detailed annual return to Income Tax on all the expenses which can be deducted from rent, and to pay tax at the “ordinary” rate (at least 30%) on some of the taxable income (according to the certain formula set forth in the law).

We should mention that as the leasing of an apartment is in Israel, Israel is the first to be entitled to receive the tax. Payments of tax in another country does not exempt the individual from payment of the tax in Israel. He must pay the tax in Israel and demand a credit for this according to the internal laws of the country in which he is a resident.

As is known according to the tax method in Israel, as long as the individual is considered an “Israeli resident”, he must submit tax returns in Israel (excluding employees in Israel up to a maximum income of a certain amount) and pay the tax accordingly. A very important criterion for examining “discontinuation of residency” in Israel, is if the individual in Israel leased his residential apartment in Israel, with real long-term leasing.

If an Israeli abroad wishes, the leasing of his apartment (or apartments) in Israel for a total amount exceeding NIS 5,100 per month) to benefit from the low tax rate of 10% and he must see that somebody on his behalf will send the tax on that date, otherwise the landlord will be forced to submit an annual return to Income Tax and pay the “ordinary” tax (and perhaps even be liable to national insurance). Submitting tax returns in Israel by a landlord of an apartment located abroad, is liable to be a tax trap. As in this way a lead is created for Income Tax to examine comprehensively the residency of that individual. In certain cases Income Tax may allege that despite the leasing of the residential apartment in Israel, the individual did not change his residency for tax purposes and therefore he is included as one who must submit a return in Israel on other income from outside Israel and to pay the tax accordingly (and thereafter also National Insurance is likely to demand its share, generally without setting off national insurance paid abroad).

Determining the status of an Israeli resident, a foreign resident, a returning resident or a new immigrant, raises the need to carefully examine the residency tests: when and how an individual discontinues residency for tax purposes? The significant tax consequences are a transition from Israeli residency to foreign residency (in order to avoid paying tax in Israel on his income abroad and a double liability for national insurance), and in order to obtain the tax benefits of a returning Israeli resident. Not ensuring proper planning and making sure of the tax rules is likely to result in tax and national insurance exposures.