The transfer of employees from Israel to abroad and return (“relocation”), the tax and national insurance consequences

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The Human Resources Manager in an international company must have know-how and understanding of the tax and national insurance laws, and accepted practice in these fields. An employer who does not see to this is likely to result in the employer having traps which will harm him. Moreover, it is possible that even the employer is liable to be harmed by such traps, from the aspect of his obligations as an employer.

What does this mean:

The tax method in Israel is “personal”. This means as long as the taxpayer is an “Israeli resident” then he must report on tax in Israel, according to his circumstances. As a result, also the National Insurance Institute will determine his liability to the Institute and entitlement to various rights. The definition of an “Israeli resident” in the law is wide and is subject to interpretations and is determined according to the term “center of life”. This term includes a long list of circumstances which must be examined (such as the place of his permanent home, his place of residence and that of his family, the place of regular employment, the place of his economic interests, and the place of activities in various organizations). In addition to the term “center of life” it bases itself on presumptions according to which an individual is considered as an “Israeli resident” or as a “foreign resident”. These presumptions were determined according to the number of days staying in Israel during the current year and previous years. Income Tax generally interprets more strictly according to the various criteria. i.e., from the income tax aspect, an employee who is sent abroad, is still liable, for a certain period, to be considered (he and his family) as an Israeli resident also while he is already abroad. Anyone who will be considered as an Israeli resident will be required accordingly to submit a return to Income Tax in Israel and to pay the tax due on all his income (including his salary abroad, options for employee shares and various financial income) worldwide, without considering where specifically it was created and the source of the income.

The need for proper preparation for discontinuing residency at the beginning of the process, even affects the return to Israel in the future. Income Tax grants excellent tax benefits to a returning resident. Not adhering to the test of residency is likely to cause the employee serious harm of non-entitlement to these benefits at the time.

One should no longer leave the matter to chance. Income Tax has access to transfer of information from many factors: the Tax Authorities abroad (by exchange of information in the double taxation treaty), banks in Israel and abroad, National Insurance, the border police and most of the computerized data bases in the country. i.e., it is highly likely that the Tax Authorities will reach those people that it should reach.

Determining Israeli residency for the purpose of income tax will necessarily result in consequences regarding national insurance and national health insurance and a charge to the employee of the relative national insurance. Regarding tax payments, it is still (generally) possible to consider even if only part of the tax paid abroad to be set-off from the tax due in Israel. But regarding national insurance and health insurance, in most countries (including the US where most Israelis are employed for fixed periods) it is not possible to set-off from Israeli national insurance. Therefore, incorrect handling in sending the employee abroad is likely to cause a serious result of double taxation with national insurance fees and national health insurance fees. Safeguarding the national insurance rights is liable, under certain circumstances, to be considered by Income Tax as maintaining the center of life in Israel, and from here it is a short distance to have to pay tax (often a considerable amount) in Israel.

Moreover, also an individual living abroad who continues to be considered as an “Israeli resident” for national insurance purposes, and is an employee of a foreign employer, will be classified for insurance purposes as “one who does not work and is not self-employed”. This definition results in “defective” rights (e.g. there is no cover of injury at work). Under certain circumstances it is possible also to see employees sent to work in subsidiaries abroad as employees of an Israeli employer, who sent them, and as a result will also make the employer liable.

Another risky exposure is the “waiting period” sanction in accordance with Section 58 of the National Health Insurance Law: Anyone who was an Israeli resident and has stayed for at least two years abroad without maintaining national insurance continuity, will not be entitled to receive medical services from public health funds over a “waiting period” after returning to Israel, whose length is one month every year abroad (minimum two month, maximum six months).

What is the “best way” between the wish to have a successful relocation without harming, heaven forbid, the employee, both from the aspect of the tax and the national insurance results and from the aspect of insurance cover?

The solution is detailed consulting for every employee moving abroad. There is need for a combination of a number of fields and examining their inclusion in each one. Every following clause, is in practice a chapter heading for many circumstances which should be clarified:

  1. An in-depth explanation to the employee on “rules of the game” when discontinuing Israeli residency for tax purposes, how this will affect his expected way of life on a personal, family and community level.
  2. Adjusting the periods of stay in Israel and abroad – planning the date of travelling abroad and planning the period of stay abroad.
  3. Examining details of the discontinuation of work in Israel agreement, the work agreement abroad, the work permit abroad and the connections between the old and the new employers.
  4. Ensuring correct completion of the tax and national insurance reports, in Israel and abroad.
  5. Tax and national insurance calculations – quantifying the tax exposure in Israel and the national health insurance exposure in Israel.
  6. Continuous medical cover until after the end of the “waiting period” for returning residents. If necessary, to carry out detailed health insurance (today there are insurance solutions and suitable grants for these matters).


The need to transfer employees from Israel abroad and back, results also in the need to thoroughly examine the aspects of residency for purposes of tax and national insurance. When an employee (also relating to the company), change residency? The traps are liable to become serious as a result. Both regarding taxation (paying heavy tax in Israel on income abroad and the right to benefit from tax benefits to a returning resident) and also regarding national insurance (negating the rights and increasing the obligations). Not ensuring proper planning will increase these exposures and as a result the question – who should bear them?).