El Al airplanes sit on the runway 370 (R).
(photo credit: Ronen Zvulun / Reuters)
Arecent Israeli court case has ruled whether work done on an El Al jet counts as
work done in Israel (Baehr Raphael vs Holon Assessing Officer, Tel Aviv District
Court, Income Tax Appeal 1235/06 and 1077/07, issued September 5,
The court’s verdict
The facts of the case
The taxpayer was an Israeli citizen who
worked as an El Al pilot, mainly on the Tel Aviv-New York route. In the relevant
years, it was accepted that he was a US resident. He was liable to Israeli tax
on income derived from work performed from a place in Israel, according to
Section 4A(a)(4) of the Israeli Income Tax Ordinance (ITO). The issue in this
case was whether time worked on the El Al jet was work done in
The judgment was issued by Judge Magen
Altuvia, who is much respected in Israeli tax cases. He reviewed the Israel Tax
Authority’s contention that the El Al plane was an Israeli “floating
The learned judge first said even if the language of the law is
unclear, a tax liability may arise when interpreting the law and analyzing its
In this case, the territorial tax liability in ITO Section
4A(a)(4) – work performed in Israel – is derived from the doctrine of “economic
allegiance,” which was enunciated in a report of experts to the League of
Nations in 1923 (Report on Double Taxation, League of Nations Doc. No. E.F.S.
73.F.19, 40 (April 3, 1923).
This report is considered to be the basis of
international taxation principles accepted in most countries in the world and
for the allocation of income among them.
The economic-allegiance doctrine
says that a country is entitled to tax a taxpayer who derives income thanks to
the rights, security and sovereign infrastructure accorded to him. The taxpayer
owes a debt of economic allegiance to the country that acts as a secret partner
in his business, and therefore he must pay it a share of his income.
court then referred to Section 2A of the Israeli Area of Jurisdiction and
Authority Law, 1949, which states: “Every airplane or vessel, wherever it may
be, which is registered in Israel, shall be regarded as being part of Israeli
territory for the purposes of jurisdiction of the law courts.” The court noted
that the purpose of this is to protect the public from the law of the jungle.
Thus, those sitting on the plane are protected as if they are in Israeli
According to the court, the Knesset intended that the “place”
mentioned in ITO Section 4A(a)(4) means both the physical place and the
Therefore, the taxpayer (pilot) was performing his
work in Israel, not because of the residency of his employer (El Al) but because
of economic allegiance that he owes Israel, which extended its authority over
the plane where he worked so that he could earn income.
court ruled that income earned on the El Al plane by the US-resident pilot was
taxable in Israel.Comments on the case
This case was a victory for the
Israel Tax Authority. Income derived from work done on an Israel-registered
plane was found to be taxable in Israel.
It remains to be seen whether
the case will be appealed. In the meantime, plenty of questions come to mind.
• Do days spent on an Israeli plane contribute to Israeli fiscal
• Also, per diem meal-expense deductions are available to Israeli
residents when working abroad. Can time spent on an Israeli plane reduce that
per diem entitlement?
• And will foreign residents who fly on an Israeli jet to
Israel to work become liable to Israeli tax when they board the plane abroad? Or
when the plane reaches another country or the open sea?
• What about planes
chartered temporarily by an Israeli airline? If the answer to any of the above
questions is “yes,” some individuals may choose to fly on non-Israeli airlines
or make sure they land before midnight.
They should of course first check
if any resulting extra tax in Israel qualifies for a foreign tax credit in the
other country(ies) concerned.
As always, consult experienced tax advisers
in each country at an early stage in specific cases.[email protected] Leon
Harris is a certified public accountant and tax specialist at Harris Consulting
& Tax Ltd.