With the war into its second year, we are experiencing a wave of enquiries from people thinking of buying a one way ticket out of Israel to live elsewhere.  Below we briefly discuss some of the tax challenges of no longer residing in Israel.

Israeli tax issues:

Here is the crunch. If you want to stop being an Israeli resident for Israeli tax purposes, it is necessary to notch up two tax years abroad at least 183 complete days and two more tax years where your center of living is abroad. If you succeed there is an exit tax (see below). The Israeli tax year ends December 31. Part of a day in Israel- (arrival and departure days – count as a complete day in Israel.

If you notch up those 4 years abroad, you generally are treated as Israeli resident from day one of the four years. If you don’t notch up 4 years abroad, you remain Israeli resident throughout. The result is a limbo period of 4 years’ wait and see, even if you are resident in another country under their tax rules.

For example, Jack resides in Israel until November 30, 2024 then moves to the USA for ever. Jack would be considered resident of Israel until at least December 31, 2024, and in limbo for Israeli tax purposes during 2025-2028. He will probably be considered fiscally resident in the US under the US 183 day tax rule from January 1, 2025.

If Jack returns to reside in Israel in, say, 2028 because his mother is unwell or his son goes into the Israeli army, he will be considered Israeli resident throughout.

Stay Israeli resident?

If someone knows they will return within 4 years, they should file Israeli file tax returns and claim various travel expenses, If they figure they will notch up 4 years abroad but return within that period, they should report any unreported income to the Israeli Tax Authority and expect lateness interest and penalties….

Can a person be resident nowhere? The Bar Rafaeli case suggests this is impossible, you have to have a “home port” somewhere.

Do tax treaties help? Israel has around 60 tax treaties with residency “tie breakers” in cases of dual residency – resident in two countries under their respective laws. Treaties don’t help with the limbo period, and they can be difficult to apply in other cases too. The main test of “center of vital interests”  is open to alternative interpretations.

If an individual succeeds in breaking Israeli residency, that person then owes an exit tax – really Israeli capital gains tax of up to 33% – as if they sold their assets one day before their departure. Failing that, they may be deemed to have elected to pay exit tax upon a deemed sale of those assets. Cash is not considered a saleable asset. Israeli real estate is taxed when sold, not via the exit tax provisions.

In reality, enforcement of the exit tax is weak and proposals were floated a few years ago to introduce notification and tax prepayment rules.

Foreign tax issues:

The new country of residence is sure to have its own residency and tax rules. Foreign taxes may include income tax, capital gains tax and estate tax/inheritance tax. The move and its timing should be checked out with Israeli and foreign tax advisors. If there are any trips back to Israel – work or vacation – consider the implications in each country.

Business issues:

If an individual stays on the payroll of an Israeli company while living and working abroad, that may create foreign corporate income tax and perhaps VAT/sales tax problems for the Israeli company (“permanent establishment” or branch problems). The business structure should be reviewed.

Double taxation:

Double taxation is often a risk, especially with regard to: the 4 year limbo period, exit tax, bonuses paid after the move, share options or restricted stock vesting after the move as well as pensions and savings. Check whether any double tax relief is available, or whether special relief needs requesting from a tax authority.

National Insurance (Social Security) issues:

The Israeli National Insurance Institute assesses residency over a 5 not 4 years. Israel has a handful of social security treaties including the UK, but none with the USA. In practice, relocated personnel and others typically pay Israeli national insurance by standing order at a fixed rate, currently around NIS 203 pm. Paying Israeli national insurance is one of many factors indicating Israeli residence, if other factors are also present.

To sum up:

Leaving Israel just ain’t easy.

Next Steps:

Please contact us to discuss any of the above matters further, or any other matter.

As always, consult experienced legal and tax advisors in each country at an early stage in specific cases.

[email protected]

© Leon Harris 4.11.2024