Working from home has its pros and cons. Some people get more work done. Others have a partner also working from home and kids who need attention.
Some people take this a step further, working for their old firm in, say, the US or UK, while located in Israel. Perhaps they made aliyah or they just have a vacation home in Israel.
What are the tax implications? Quite a lot actually in each country. Below we review some of the possible tax issues.
Corona excuse wearing thin?
During the coronavirus pandemic, the OECD and many countries said if a person was “stranded” abroad, they should be taxed as if they were back in their home country. Now that the pandemic is starting to subside, this generally won’t work.
Israeli tax law deems a person to be fiscally resident once their center of living shifts to Israel, having regard to their overall family, economic and social circumstances. In practice, this can be vague, so the law includes two rebuttable presumptions of residency in Israel: 1) present in Israel 183 days in tax year (ending December 31), or 2) present in Israel 425 days over three years, including 30 days in the latest year. Ceasing Israeli residency later on may take four tax years.
The first sting: Once an individual becomes Israeli resident, that person enjoys a 10-year exemption from Israeli tax on foreign-source income and gains. However, that exemption does not extend to work done physically in Israel for a foreign company. Israel gets the first bite of the tax cherry, not the payroll department in a foreign company. Some tax treaties might allow a 182-day exemption if various conditions are met.
The second sting: The foreign company might be deemed to be doing business in Israel if it employs the individual in Israel. In such a case, the foreign company would be considered to have a taxable branch in Israel, meaning it has to register here and pay monthly Israeli company tax (23% of branch profit), VAT (17%) and even payroll taxes (up to 50%). Israel’s tax treaties usually won’t help as they deem the branch to be a “permanent establishment” (PE) if there is a fixed place of business in Israel, such as the individual’s home in Israel.
THERE IS sometimes a third sting: If the individual in Israel exercises “control and management” over a foreign company, e.g. because he/she owns and manages it from Israel, the foreign company might become Israeli resident and taxable in Israel on its worldwide profit, not just the Israeli branch profit. Some of Israel’s tax treaties have an “effective management” criterion which is similar to “control and management.” Others require the tax authorities of both countries to consult and try to agree where the effective management is exercised. Such agreement can take considerable time if reached at all.
As for VAT, Israel requires an Israeli VAT registration and reporting if any part of a business is done in Israel. Sales revenues may be liable to 0% VAT but not for services relating to people or assets in Israel or registered in Israel (Lloyds of London was found to be registered in Israel as a foreign insurer in the Kasuto case). If you are late, then aside from fines, you may forfeit input VAT on Israeli expenses after six months.
What about claiming home office expenses? For self-employed workers, it is standard practice to deduct 25% of rent and other domestic expenses, but only if up to 30% tax was withheld from rent. The lease might not always allow office work at home.
Possible foreign implications
It is difficult to generalize for all foreign countries, but here are a few general points for starters.
If a foreign country thinks you still reside there under its rules, it might not grant a foreign tax credit, meaning double taxation for people and companies.
Some countries impose an exit tax (capital gains tax) on individuals who stop residing there – such as Canada, South Africa (and Israel if you leave Israel).
US citizens remain accountable to the IRS (as well as Israel) unless they renounce their US citizenship or green card. Specialist US advice is needed.
Some countries retain inheritance tax/estate tax/gifts tax at least on assets in those countries upon your eventual demise.
Social security/national insurance implications vary considerably, so check them out.
What should you do?
Clear-cut action is usually better than ambivalence, but check out your business and personal side to avoid surprises
Wishing readers a Happy New Year!
As always, consult experienced tax advisers in each country at an early stage in specific cases. [email protected] The writer is a certified public accountant and tax specialist at Harris Horoviz Consulting & Tax Ltd.