Reduction in the income tax liability in Israel due to setting-off expenses abroad

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Generally, the first protection of an Israel who relocates to abroad will be that he became a “foreign resident” already at the time of leaving Israel. Anyone who is not an “Israeli resident” will not be liable to tax in Israel on his income from abroad.

The second line of defense is likely to be the deduction of expenses abroad which will be set-off from income from abroad which apparently is liable to tax also in Israel. Income Tax enables a set-off of expenses from income achieved abroad and taxable in Israel. These expenses are valid also regarding a long-term trip from Israel to abroad (“relocation”). I.e., there are situations where even if Income Tax will contend that the individual is an “Israeli resident” then the tax liability will not arise due to deducting expenses that will set-off from income from abroad (and in addition a credit on tax paid abroad on that income). The basic conditions for deducting expenses this relates to expenses paid by the taxpayer (and not, for example, by the employer and on condition that the “trip” abroad and the stay there were essential  for creating the income).

The following is a summary of the expenses and the amounts deductible for a long-term stay (over 90 days abroad) (the amounts are in US dollars and updated to 2014):

  1. Airline ticket: Tourist class – 100% of the price of the ticket, business class or first class – 100% of the price of the ticket in business class on that flight.
  2. Lodging expenses “with receipts” (including according to an apartment rental contract) – the first 7 nights up to $262 per night; for over that period not less than $115 but not more than $197 per night.
  3. “Other” expenses (this relates to board and lodging expenses): If expenses are claimed for lodging – not more than $74 per day; if expenses for lodging are not claimed (for example that they stayed with friends or family) – not more than $123 per day.
  4. Renting a vehicle abroad – the actual rental expenses but not more than $58 per day.
  5. Education for children – (only if the taxpayers stayed abroad for a consecutive period of 10 months and that children are not yet 18 years old), an amount not exceeding $649 per month per child. Income Tax may allow deducting higher expenses considering the location of residence and the study conditions.

In the following countries it is possible to deduct 125% of these amounts: Australia, Austria, Italy, Iceland, Ireland, Angola, Belgium, Great Britain, Germany, Dubai, Denmark, Holland, Hong Kong, Taiwan, Greece, Japan, Luxembourg, Norway, Spain, Oman, Finland, France, Qatar, Korea, Cameroons, Canada, Sweden, Switzerland (the US is conspicuous due to its absence).

We should add that it is possible to claim additional expenses to the extent of the “creativity” of the taxpayer and his representative, and particularly in the case where the taxpayer operated a business abroad (even as a freelancer).

But together with the aforesaid, it is important to remember that even there is no payment of tax in Israel on ordinary income of the individual (due to deducting expenses and/or credit on foreign tax), it is still important to examine the discontinuation of Israeli residency for tax purposes, in a correct way due to additional tax exposures. Paying national insurance in Israel, distributing profits from exercising options to employee shares, entitlement to benefit from income tax credits to a “returning resident”,  a significant holding in companies which actually operate. Each case according to its circumstances.