Israeli residents relocate abroad for a variety of reasons, sometimes business, sometimes personal. If the relocation is for a short period, they will typically claim various expense deductions for Israeli tax purposes and claim a foreign tax credit if they are taxed both in Israel and abroad.
At what point does an Israeli resident stop being a resident for Israeli tax purposes?
According to Section 1 of the Income Tax Ordinance, an individual who intends to stop being an Israeli resident must satisfy a four-year test, in which case he will be deemed resident abroad for the entire four-year period. The test is satisfied if: (1) the individual has been outside of Israel for at least 183 days in the tax year in question and in the following year; and (2) his center of vital interests is not in Israel in the third and fourth years.
Israel has tax treaties with more than 50 countries.
Each treaty contains a “tiebreaker” rule for resolving cases of dual residency; i.e., when two countries regard you as a resident under their domestic legislation.
This is quite possible if Israel applies its fouryear test and another country has no such test. The tiebreaker clauses look mainly at: (1) permanent home; or, failing that, (2) center of vital interests.
The ITA published early in 2014 an anonymous ruling (4387/13) illustrating such a situation. In it, an individual left Israel in July 2010 and took up fiscal residence in a treaty country. The individual worked there for a subsidiary company of an Israeli group.
The individual also returned to Israel to serve the country for less than 90 days per year (23 days in 2011 and 55 days in 2012).
The ITA ruled that for tax-treaty purposes, the individual stopped being an Israeli resident, so long as the individual spent no more than 90 days in Israel, and the spouse no more than 75 days. For domestic Israeli purposes, according to the ruling, Israeli law continues to apply, such as the four-year test and the exit tax.
Consequences of becoming nonresident
Becoming a non-Israeli resident does not mean no more tax.
First, there may well be tax to pay abroad.
Second, it is usually prudent to make arrangements to continue paying National Insurance Institute (social security) contributions at a low level. This is in case claims arise during any visit to Israel; it also helps facilitate renewed social-security coverage without a six-month waiting period if the individual returns to Israel after relocation; say, within five years.
Third, Israel has an exit tax. Individuals who become nonresident are generally liable to Israeli capital-gains tax at rates of 25 percent to 50% as if they sold their worldwide assets at market value one day before they ceased to be residents. This “exit tax” also applies to, inter alia, employees’ share options and purchase arrangements.
The exit tax is payable upon departure or upon the sale of the relevant assets, at the taxpayer’s choice.
An exemption applies if the tax will be due later in Israel upon disposal; for example, regarding Israeli real estate. New or returning residents who depart again within their period of tax exemption (usually 10 years) remain exempt with regard to overseas assets.
Look before you leap out of Israeli residence. Israel now has tax rates below the OECD average and no estate or inheritance tax. And the human factor matters: Uprooting family members and leaving others behind isn’t always easy.
As always, consult experienced tax advisers in each country at an early stage in specific cases.
email@example.com Leon Harris is a certified public accountant and tax specialist at Harris Consulting & Tax Ltd.
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