The tax exposures of working from Israel for a foreign employer abroad

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Many first time residents (Olim Chadashim) and also returning residents (who spent over 10 years abroad) keep on working as employees for their foreign employers prior their Aliya / return to Israel.

Although the Israeli tax ordinance, try to give many relieves to this audience of tax payers, for example the 10 years exemption from reporting and paying taxes on incomes earned abroad, many of those who physically work from Israel and spend most of the year here, are not aware that they are severely exposed to tax accidents on many aspects.

First of all, they are not exempt from reporting and paying taxes in Israel, on the contrary – Israel has the right to tax them although their employer would probably withhold their taxes and transfer it to the local tax authority abroad. In this case, this person should first report and pay taxes to the Israeli Tax Authority and afterwards to the foreign tax authority (if mandatory as in the US for example). The taxes that were paid to the ITA would be credited by the foreign tax authority (the IRS for US citizens in our example).

Second, now that they are officially Israeli residents (their center of life is in Israel since their Aliyah / return), they have to pay Bituach Leumi (IL National Insurance) on their salaries from the foreign employer. This could reach significant amounts of money and definitely mean double tax payments (both to the foreign country and to Israel).

Third, the person who now works from Israel for the foreign employer, might create a permanent establishment for this employer (depends on various conditions) and by doing so, the employer may need to pay taxes on the incomes that are attributed to Israel.

There are ways to overcome these obstacles and it’s highly recommended to consult before taking such steps.