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

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...

Who has the first right to tax you according to the tax treaty?

Many Olim Chadashim and 1st time residents, has to keep on filling tax returns in their country of origin which is also the main place where they keep doing business at (there sit their clients, suppliers, advisors etc) For example, Ole Chadash from the US who has a running business that was established there (LLC or s-corp) prior to the Aliyah, keeps on filling tax returns (1040) in the US since he/she would still consider a citizen (although not a resident) This Ole, would probably mistakenly think, that if the business was established in the US prior the Aliyah, then he should keep on paying taxes to the IRS and the US government even if he doesn't live there anymore Even if he goes to the US from time to time for work, it still doesn't mean that the US has the first right to tax the business Here comes the tax treaty between 2 countries, that determines which country has the first taxation right - the country of the income's source, or the country of...

Facing Bituach Leumi as a Self-Employed / Freelancer / Sole Proprietor

When an individual wants to open a business in IL, there are basically 3 tax authorities to open a file with – the Income tax authority, the VAT authority (both under the ITA umbrella) and Bituach Leumi (there is essentially a 4th one that is actually a separate department in the income tax authority called "Nikuim" ie "withholding tax" but it is relevant only if you hire employees) The first 2 authorities – Income Tax and VAT – are the first and primary stop in order to open files for the new business The 3rd – Bituach Leumi – is actually optional if you don't expect earning more than 2,500 NIS per month (roughly) The reason is that under this amount, you won't be considered as a self employed for BL and hence you're not liable thru the eyes of this authority (whereas you could definitely be liable by the other 2 mentioned) If you still want to ensure your earnings if its under 2,500 NIS it is possible under a certain work hours scale declaration If you actually...

Discontinuing residency even in the case of a relocation of less than 3 years (the Tsur verdict)

Recently (October 2014) a precedent verdict was issued in the District Court by Justice Sokol relating to the question of discontinuing Israeli residency In this verdict, the appellant – Ms Yael Tsur, received a proposal to work for a subsidiary abroad of the ZIM parent company where she worked in Israel Ms Tsur, together with her spouse who resigned from his work, and their children, left for Hong Kong and lived there for a period of less than 3 years (2 years and 8 months) Although from the aspect of the number of days that she is considered an Israel resident as she stayed over 30 days a year and in total 425 days together with the two years prior to that, but from the aspect of the center of her life, whatever is determined between the two, Ms Tsur proved, in the opinion of Judge Sokol, that the center of her life was transferred to Hong Kong Despite the fact that the period of stay was fairly short (according to professional circulars that the Tax Authorities published on...

Payments of National insurance by Israelis abroad

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...

Tax planning in connection with Israelis abroad who must report to the Israeli Tax Authorities

The Income Tax Regulations in Israel set forth a list of “aggressive” tax planning that they intend to fight “Aggressive” tax planning is characterized by one or more of the following elements: It has no stable economic basis, it relies on a weak verbal technical interpretation, its main purpose is to reduce tax in an extreme way, and does not have reasonable disclosure in taxpayers’ tax returns Income Tax requires in the annual tax returns reporting on performing such tax planning and if it is of the opinion that the tax planning is not legitimate it will demand a payment of tax accordingly, and also impose a fine at a rate of 30% on the unjustified reduction in tax A taxpayer who did not report on tax planning, without sufficient reason, will be defined as a criminal The list requires taxpayers who chose up to now to “conceal” their tax planning to specifically disclose their actions This does not prevent the taxpayers from dealing with the question of the legitimacy...

Income tax and national insurance of Israelis located in the US

Income Tax in Israel defines an “Israeli resident” for tax purposes using to the term “center of life” In addition, the law stipulates presumptions of residency according to the number of days the taxpayer stays in Israel in the current year Income Tax stipulates therefore, that an Israeli moving abroad, is likely to still be considered (he and his family) as an Israeli resident for tax purposes, even if he already lives for a certain period abroad The meaning of determining Israeli residency is the obligation of an employee to report to Income Tax in Israel on his income worldwide, and his liability for national insurance in Israel Determining the date of change of residency is not simple due to the complex system of tax laws in Israel and abroad, various regulations, tax treaties, professional circulars, procedures, practice and the theoretical and oral law The following are three real examples of the considerable financial consequences of defining residency for tax...

When does a returning resident need to prepare vis a vis the Israeli Tax Authorities?

Relocation is a complex process which requires serious efforts and also physical efforts Often the effort required from an individual and his family is so considerable that they do not find some time to devote to planning their tax and national insurance This when actually relocation is the year when there are many tax traps, together with national insurance traps Moreover, with correct planning it is possible to utilize during the relocation year many tax and national insurance advantages which result in real saving We take for an example an individual who in the past was an “Israeli resident”, became a “foreign resident” and now is returning to Israel (“an ordinary returning resident”) The following is a list (not closed) regarding which, should there be one or more of the following situations, then that individual must know how to prepare with the Tax and National Insurance Authorities in Israel, whether in order to submit returns and tax payments or in order to...

5 Tax traps for Israelis abroad

The tax system in Israel is “personal” That means as long as an individual maintains his residency (to distinguish from Israeli “citizenship”) for tax purposes, then he is required to pay taxes on his income worldwide, from all sources of income, of whatever source In this article I should mention five widespread traps of someone who did not know how to disconnect his residency for tax purposes, as Income Tax expects disconnection of residency, ie he will be considered as an “Israeli resident” despite the fact that he lived abroad Annual tax returns to Income Tax: An Israeli resident who produces income abroad, is required to submit an income tax return in Israel and to pay the tax accordingly Although it is possible to deduct certain expenses, and to be credited for taxes paid abroad (although not always the full amount), but it is clear that the first trap will be the actual obligation and bother to file an annual return to Income Tax (often as...

Tax consequences to an Israeli resident holding an LLC in the US

Many Israelis carry out activities in the US through holdings in an LLC type corporation In the past, particularly up to and including 2002 (prior to the reform in Israel of taxation abroad), there were tax advantages for this form of activities In 2004 Income Tax in Israel published a professional circular regarding the tax consequences of these type of activities, as a result of the tax reform According to the tax laws in the US, the existing default for an LLC is relating to it as a “transparent” body for tax purposes, ie the income is considered as income of the persons holding it (similar to a partnership) Nevertheless, the LLC can choose to be considered for tax purposes in the US as a regular company As there is no special reference in the Israeli tax laws, then from a legal aspect in Israel the LLC is considered as an ordinary company, whose income and losses do not relate to the holders of it ie, a situation is created in which the Israeli individual paid tax in the US...

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

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”) Ie, 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...

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

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...

Tax refunds to foreign residents on real estate investments in Israel

When selling real estate in Israel, the State of Israel imposes on the seller a tax called “betterment tax” This tax which is in nature “capital gains tax” is imposed on the betterment due to an increase in the value of the real estate during the period from the date of its acquisition until the date of its sale According to the law, this tax is in principle an advance on account of income tax imposed on citizens of the State each year Where the seller is an “ordinary” Israeli resident, then he is obliged to submit in Israel an annual tax return in which all his income is included, including profits from the sale of real estate In the annual tax return, the tax liability is considered as a final tax According to this settling of accounts, there are cases where it becomes clear where the seller is entitled to receive returns from the State for tax overpaid in a real estate transaction (or be debited for an additional amount) Consequently, there is nothing to prevent anyone...

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

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...

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