Contrary to popular belief, if an Israeli resident is assigned to work abroad, that individual does not automatically drop out the Israeli tax net. They will generally be taxable where they work and taxable in Israel if they remain Israeli residents - but Israel may allow various deductions and a foreign tax credit. This article reviews some of the Israeli tax rules for Israeli residents who relocate abroad. Who is taxable in Israel? Resident individuals are subject to tax on their worldwide income and worldwide capital gains. An Israeli resident individual is defined as a person whose center of living is in Israel, taking into account the person's family, economic and social links. This can apply even if they are present in Israel less than 183 days in a tax year (or 425 days over three years). Rules for Israelis working abroad? Different tax regimes apply in Israel depending on whether the individual is (1) an Israeli resident employed abroad for more than four continuous months by an Israeli employer (2) an Israeli resident working abroad in other circumstances (foreign employer, self- employed etc.) (3) non-Israeli resident individual. Working abroad for an Israeli resident employer. Under this scenario, Israeli residents who work abroad for an Israeli resident employer for a continuous period of more than four months are taxed in Israel at special rates on taxable employment income and benefits. These rates which are expressed in US dollars rather than shekels. This scenario is likely to apply if an Israeli company employs the individual abroad for more than four months. If the individual returns to Israel on weekends, it is unclear whether his stay abroad will be considered a "continuous" four-month period. However, assuming he returns to Israel for less than two weeks at a time, it appears that the continuity will not be considered to be broken. The current Israeli tax rates (in US dollars) for such persons are as follows: * 20% on monthly income of $0 - $1,100 * 30% on monthly income of $1,101 - $2,200 * 40% on monthly income of $2,201 - $3,300 * 45% on monthly income of $3,301 - $4,400 * 48% on monthly income over $4,400. Deductions for Israeli tax purposes in such cases are as follows: * Personal deductions are granted in lieu of the regular system of "credit points" for Israeli residents as follows: * 50% of base salary for monthly income of $0 - $2,000 * 45% of base salary for monthly income of $2,001- $6,000 * 50% of base salary for monthly income over $6,000 The base salary for these purposes is prescribed according to location, for example $3,640 in the USA and 2,768 in the UK. * Tax deduction for travel costs at the start and completion of the overseas assignment for the assignee, spouse and children under 19 and home leave travel once every two years of the assignment. * Housing allowance up to a prescribed amount. The monthly housing allowance is limited in New York to $5,200 ($5,000 in Manhattan), $4,200 in London and $3,000 in the rest of the UK. However, details and proof of rental income received from rental of the employees' private Israeli residence must be presented by the company to the Israeli tax authorities - this is to ensure that private rental income is taxed unless it is below the taxable limit. * Allowable medical expenses for the assignee, spouse and children under 19, up to the same service level normally given in Israel. * Allowable meal expenses up to $35 per day for business travel from the assigned country to another overseas country (excluding Israel). ($8 breakfast, $15 lunch, $12 dinner). * Education allowance - Limited to $450 per month for each child below 19 throughout the year. The Israeli Tax Authority (ITA) may allow a higher deduction (typically 25% more) having regard to the location and educational conditions. Working abroad for a non-Israeli resident employer. Under this scenario, Israeli residents working abroad as self-employed persons or for non-Israeli resident employers or for Israeli resident employers for a period of less than four months, are taxed at the regular Israeli tax rates on taxable employment income and benefits. The following table presents the regular monthly taxable income brackets for 2006. * 10% on monthly taxable income of NIS 0 - NIS 4,280 * 22% on monthly taxable income of NIS 4,281 - NIS 7,620 * 29% on monthly taxable income of NIS 7,621 - NIS 11,440 * 36% on monthly taxable income of NIS 11,441 - NIS 20,420 * 37% on monthly taxable income of NIS 20,421 - NIS 35,370 * 49% on monthly taxable income of NIS 35,371 or more Deductions for Israeli tax purposes in such cases are as follows: * Airplane tickets purchased for business purposes, but no more than business class rates. * Daily lodging allowance, dependent on the period spent abroad. For the first 7 days, the daily lodging allowance may not exceed $222. For a period of 8-90 days, 75% of the expenses between $98 and $166 are deductible. For a period over 90 days, and starting from the first day, the daily deductible expense may not exceed $98. Proof of expenses is necessary, such as a rental agreement. * In addition to the above daily lodging allowance, a per diem allowance of $62 is deductible. Proof of expenses is not required. * If the above two allowances are not utilized, a flat rate allowance of $104 per day is available. Proof of expenses is not required. * An additional allowance of up to $49 per day is allowable for car expenses including car rental, car taxes, fuel and insurance etc. Proof of expenses is necessary. * Education allowance if a stay is over 10 months is limited to $557 per month for each child below 18. The ITA may allow a higher deduction having regard to the location and educational conditions. In various countries, the deductions for lodging and per diem expenses may be increased by 25% of the above-mentioned amounts. These countries include the following: Hong Kong, Korea, Italy, Angola, Germany, Netherlands, Norway, Finland, Cameroon, Switzerland, Taiwan, Australia, Iceland, Belgium, Dubai, Greece, Spain, France, Canada, Japan, Austria, Ireland, Denmark, Luxembourg, Oman, Qatar, Sweden and the UK. Non-Israeli resident working abroad. In the case of a non-Israeli resident working outside of Israel, no Israeli tax liability should arise on such employment income. Consequently, expenses will not be deductible in Israel. Exit Taxation. Persons who cease to be Israeli residents are generally liable to capital gains tax at rates of 20% - 49% as if they sold all their assets one day before they ceased to be residents. This especially applies to employee stock option and purchase arrangements. The tax is payable upon departure or upon the sale of the relevant assets. An exemption applies if the tax will be due later in Israel upon realization, for example regarding Israeli real estate (if the residential home exemption is not applicable). Foreign tax credits. Israel generally allows a credit for foreign federal and state taxes on foreign source income, but not city taxes. Detailed rules apply in this regard. National insurance (social security): Israeli residents are entitled to Israeli social security benefits. For the first five years, the Israeli National Insurance Institute tend to apply a wait-and-see attitude to the question of an individual's residency status. This means that even after five years, the National Insurance Institute could review the facts and conclude that residency and social security benefits were terminated upon departure from Israel, especially if no National Insurance contributions were paid after departure. Subject to any social security totalization agreement, if an individual remains an Israeli resident and employed by an Israeli resident employer, regular Israeli national insurance rates are generally collected. If an Israeli resident is employed abroad by a foreign resident, they may in practice apply to the National Insurance Institute to pay a more limited national insurance contribution of NIS 137 per month (currently) and receive correspondingly limited Israeli social security benefits. In practice, it is recommended that comprehensive private medical coverage be arranged for Israelis working abroad and their families. Other detailed rules exist. Exchange control: None in Israel. To sum up, Israelis working abroad perform a valuable role, but may remain taxable in Israel. It is advisable to obtain upfront professional advice in Israel and the other country concerned. The writer is an International Tax Partner at Ernst & Young Israel.