Your Taxes: Tax credits for foreign workers

A credit point is not a deduction from your income, it is a reduction of your tax. So 2.25 credit points will reduce your monthly tax bill by NIS 400.

taxes88 (photo credit: Courtesy)
(photo credit: Courtesy)
Some regulations have just been issued that update previous temporary rules for foreign workers in Israel. The regulations grant 2.25 "credit points" to certain foreign resident individuals when calculating his or her Israeli tax liability on salary income or income from a business or profession. [Income Tax Regulations (Credit Points for a Foreign Resident), 2007. A credit point is not a deduction from your income, it is a reduction of your tax. So 2.25 credit points will reduce your monthly tax bill by NIS 400. However, these credit points are of limited application and are not available if the individual is a "foreign expert" who earns over NIS 11,000 per month and works legally in Israel in his area of expertise at the request of an Israeli resident (not if requested by a manpower agency). Separate regulations allow "foreign experts" who earn over NIS 11,000 per month to claim deductions from income in their first 12 months in Israel equaling their accommodation costs (if they pay them - or exempt benefit if the employer pays) and a per diem living allowance of NIS 270 per day in Israel. Detailed rules apply. You will be considered a foreign resident if your center of living is not in Israel. You are assumed to be an Israeli resident if you are present in Israel at least 183 days in a year, or at least 425 days over three years including at least 30 days in the latest year under review. But the number of days is not conclusive. Aside from the number of days' presence in Israel, the center of living criteria listed in the law are: location of permanent home; place of residence of the individual and his/her family; place where the individual regularly works or is employed; location of active and material economic interests; place where the individual is active in various organizations, associations or institutions; employment by official bodies, namely the State of Israel, a municipality, The Jewish Agency, Joint Israel Appeal/Jewish National Fund, State-owned company, official or statutory body. Individuals who relocate to Israel may avoid being deemed Israeli residents in certain cases. This applies to the following persons: * Diplomatic representatives or consulate officials on official full-time duty for a foreign state as well as their spouses and children * Soldiers of foreign armed forces or the UN * Individuals who come to Israel to serve in the Israel Defense Force, until the end of their service, if they elect to remain non-resident * Students studying at least half a course, during their first three years in Israel, if they elect to remain non-resident * Teachers, lecturers or researchers living in Israel at a higher education institution or other teaching institution where they perform a function, during their first three years in Israel. * A priest performing a function at a religious institution in Israel at its request, during their first three years in Israel. * A patient hospitalized in a hospital or convalescence home who came to Israel to be hospitalized or fell ill while in Israel, if he would not otherwise be considered an Israeli resident * Foreign journalists during their first four years in Israel * Sportsmen, during their first three years in Israel But before rushing to pay the tax, check if you are exempt in Israel under a tax treaty between Israel and your home country - for example treaties with the US, Canada, UK, South Africa, Thailand, Romania, France and Germany (none with Australia) allow an exemption for individuals sent by a foreign employer to Israel for less than 183 days in a year if certain additional conditions are met - the conditions vary from treaty to treaty. If you are still taxable in Israel, check if you can credit the Israeli tax against tax in your home country - most countries allow this. For example, suppose you are a foreign resident worker in Israel for an Israeli employer who earns NIS 15,000 in July 2007 and you pay apartment rent, electricity, city taxes and maintenance (vaad habayit) expenses that month of NIS 2,000. You are present in Israel the entire month. Following is an estimate of your Israeli taxes: * Gross monthly income: NIS 20,000 ($4,700 approx.) * Less: Accommodation deduction: NIS 2,000 * Less: Per diem deduction NIS 270 for 31 days: NIS 8,370 * Taxable income: NIS 9,630 * Israeli tax per tax tables: NIS 1,714 * Credit Points - none for "foreign expert" earning over NIS 11,000 per month * National insurance - for foreign resident employee: NIS 76 * Net paycheck before expenses in this example (20,000-1,714-76): NIS 18,210 * Tax in home country after credit for Israeli tax: You should check this. As always, consult experienced tax and legal advisers in each country at an early stage in specific cases., Leon Harris is an International Tax Partner at Ernst & Young Israel Yaki Itzhaki is a global mobility specialist at Ernst & Young Israel