Your Taxes: Employers' obligations over foreign workers can be tricky

What is the Israeli income-tax treatment for foreign workers?

tax88 (photo credit: )
(photo credit: )
Employers in Israel pay a 10 percent payroll levy regarding foreign workers to the Israel Tax Authority. This is prescribed in Section 44 of the Law for Economic Recovery in Israel (Legislative Amendments to Achieve Objectives Regarding the State Budget and Economic Policy for the Fiscal Years 2003 and 2004). Nevertheless, the employer is exempt from this levy if the employee's salary is more than double the national average wage, or if the employee provides personal care, is a foreign journalist, a foreign sports person, or lives in a country bordering Israel. According to the recently passed Economic Efficiency Law (alias the Budget Law), the rate of the levy will go up to 20% commencing January 1, 2010. However, there are a few exceptions to note. In the agricultural sector, the levy will remain at 10%. In the industrial and construction sectors, the rate will increase to 15%. And in the ethnic-restaurant sector, the rate will be 10.75% in 2010, 13.75% in 2011 and 15% in 2012 onward. Who is a foreign employee? According to Section 44 of the Law for Economic Recovery in Israel, a foreign worker is someone who is not a citizen or resident of Israel. This may seem vague, but clarification was given by the Tel Aviv-Jaffa District Court in the case of Telrom Human Resources Ltd. vs Assessing Officer Tel Aviv 5 (Income Tax Appeal 1061/07 in 2008). A foreign worker is someone defined as such in the Foreign Workers Law (Prohibition of Illegal Employment and Assurance of Fair Conditions), 1991. This is a detailed piece of labor legislation that aims to protect the rights of foreign workers who come to Israel on a work-permit visa, and is different from the Income Tax Ordinance. By contrast, the Income Tax Ordinance defines a resident as someone whose center of living is in Israel; a foreign resident as a person whose center of living is outside Israel and who is absent from Israel 183 days in the tax year concerned and the following tax year. What is the Israeli income-tax treatment for foreign workers? As for income tax, most of Israel's tax treaties with 47 other countries grant an income-tax exemption for employees resident in those countries but working in Israel if they are employed in Israel by a foreign employer for a period not exceeding six to 12 months. However, the exact treaty terms should be checked in each case. In practice, the employer will usually be an Israeli resident, so a treaty exemption is not often applicable. If no treaty exemption applies, expatriate nonresidents working in Israel lawfully for an employer may enjoy a deduction for accommodation expenses incurred, and a daily living-expense deduction of up to NIS 290, for up to 12 months for "foreign experts" who are paid at least NIS 11,800 per month and are legally present in Israel after being invited by an Israeli employer that is not an employment agency. After 12 months in Israel, the employee may claim personal credit points if that individual then becomes an Israeli resident (center of living in Israel). The individual may continue to enjoy an exemption on non-Israeli source income and gains for 10 years as a new Israeli resident. A reduced tax rate of 25% is available for three to four years for foreign journalists, sports players and "approved specialists" in industry or tourism, subject to various conditions and procedures. National Insurance Institute payments, exemptions Israel has a handful of social security totalization agreements with 13 other countries that exempt a foreign worker from one of those countries from Israeli National Insurance Institute contributions in certain circumstances. There is no social security totalization agreement with the United States. In any case, the NII contributions for foreign resident workers are minimal: monthly income NIS 0 to NIS 4,757 - employer pays 0.54%, employee pays 0.04%; monthly income NIS 4,757 to NIS 76,830 - employer pays 0.77%, employee pays 0.87%. The NII coverage for foreign workers is correspondingly minimal, and it is mandatory for employers to arrange adequate medical insurance for foreign employers. The National Insurance Law (Consolidated Version) 1995 provides that a foreign resident worker is, among others, someone with a work-permit visa (B1). Wishing all our readers a happy, healthy and prosperous Rosh Hashana. As always, consult experienced tax advisers in each country at an early stage in specific cases. Leon Harris is an international tax specialist at Harris Consulting & Tax Ltd.