Payments of National insurance by Israelis abroad

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There is a phenomenon in which many Israelis pay to National Insurance in Israel also after leaving Israel. The basic reason is to maintain medical insurance in the State of Israel which is due to its residents and to maintain “continuation of rights” to receive various stipends from National Insurance. Many do not pay any attention to the significance of this step, and transfer payment for the minimum stipulated in the law “because this is what I heard people do”.

The significance of paying to National Insurance, even if the amount is minimal, is that the payer declares his Israeli residency for national insurance purposes. In the past, an Israeli abroad, can contend (under certain circumstances) that despite his Israeli residency regarding he is not liable to income tax in Israel. As a result of the income tax reform in Israel and the change in the tax method, this contention has become more difficult to prove, particularly during the transition year abroad.

One of the first and central questions that income tax authorities clarify regarding Israeli income abroad, is how that Israeli acted vis a vis national insurance. An individual Israeli will have a problem claiming Israeli residency in order to benefit from the national insurance cover (if, heaven forbid, he will require hospitalization in an Israeli hospital) and at the same time declare to income tax that he has foreign residency (in order not to report in Israel on his income abroad, including for exercising options for shares received in Israel). In addition, submitting a report to Income Tax in Israel on income abroad, will result (in addition to tax payments) also increasing national insurance payments. In most countries in the world (and particularly with the US), there is no possibility to setoff social security payments with payments to National Insurance in Israel, contrary to income tax payments, and in every case, it is not possible to set off Medicare payments abroad with National Health Insurance in Israel.

It is possible that there will be situations where there are not necessarily tax payments in Israel, and then the income tax “risk” is not significant. For example, when an individual Israeli does not have taxable income abroad, or that he can prove that he paid recognized expenses for tax purposes which set-off the small amount of income. It is also possible that the medical situation of that Israeli individual and the chances of medical hospitalization, are high enough in order to justify the need to cover national insurance, despite the income tax risk. In this regard we should mention that the medical exposure continues even after returning to Israel in view of the provisions of the Health Insurance Law: An Israeli staying abroad from March 2001 and is in arrears in payments of health insurance for more than a year, revokes his right to receive medical services on his return to Israel. The period of revocation is one month for every year’s absence, (a maximum of six months, and the period of waiting can be redeemed with a monthly fine of approximately 12K NIS, under certain circumstances).

Actually, there is a conflict between the legitimate desire to reduce the tax exposure, and the importance of maintaining suitable medical cover in Israel at a reasonable cost. To the extent that the individual Israeli abroad wishes to be hospitalized in Israel on the occurrence of any medical event, despite the exposure to paying income tax, he will be inclined to be insured with National Insurance in Israel. As far as the Israeli resident abroad is of the opinion that he is “healthy” or he has better medical insurance alternatives, and then when his tax exposure is high (including due to his/her spouse) then he will tend to avoid paying national insurance. We should mention that in any case after a number of years of staying abroad and paying insurance fees, National Insurance will examine the linkage of the Israeli individual, and decide accordingly whether to negate his residency or to continue it.

Of course, every case is special and every Israeli individual should decide according to his personal circumstances. In any case, my suggestion is that any act which is a “tax event” and even complete the forms with the Tax Authorities and National Insurance, should be done by accompaniment by suitable consultancy in order to avoid tax and national insurance traps, which an individual often does not even think of.