The Israeli District Court recently gave an interim decision that leaving Israel to reside abroad may be easier than emptying your Israeli pension fund as you go (Civil Appeal 1740-12-24 of 28.11.25).
This may be relevant both to emigres from Israel and immigrants (Olim) who decide to go back after opening an Israeli pension fund (Kupat Gemel). Quite a few people leave Israel permanently or for lengthy periods due to personal, family or business reasons – especially in the tech sector.
Main facts:
The taxpayer was born in England but resided in Israel in the years 1994-2020 before returning to live permanently back in England. In December 2020 the taxpayer cashed in severance, pension and study (hishtalmut) monies despite this not being allowed before retirement age under Section 87 of the Income Tax Ordinance.
Section 87 seeks to preserve such monies until retirement age (men 67, women 64 generally). The penalty for early payout is a 35% tax charge.
However, the taxpayer claimed he was exempt from the 35% Israeli tax charge under the Israel-Uk tax treaty and taxable only in the UK. The Israeli Tax Authority (ITA) disagreed and sought a guarantee that amounts due would be paid.
The Judge (the honorable Avi Gorman) ruled in favor of the guarantee, and in doing so, gave an interim decision only on the merits of the taxpayer’s case. The interim decision challenges the use of the Israel-UK tax treaty. This treaty is similar to many other tax treaties. A different final decision is urgently needed as discussed below…..
What the Judge said:
The Judge noted it was undisputed the taxpayer left Israel in 2020 and had no assets now in Israel.
The Judge wrote that the arguments of the taxpayer “are based on Article 17(1) of the treaty for the avoidance of double taxation with England and is not covered by earlier Articles of the treaty and isn’t easy fundamentally. These matters require inquiry and review, and this is not the stage to decide about them. But pay attention to the clear connection between the income which was generated from years worked by the taxpayer as an employee in Israel; it seems it will not be easy for him (i.e. the taxpayer) to be convincing that England has sole right of taxation”.
The Judge said this partly because the taxpayer did not obtain confirmation of UK residency from the UK tax authorities (i.e. HMRC) in case they claimed the right to assess him.
Therefore, the Court ordered the taxpayer to provide a guarantee in the amount of NIS 20,000 (by 27.11.25) failing which the taxpayer’s appeal would be dismissed. That was the interim judgement, we currently await the main judgement.
Comments:
We have many comments on how the main judgement apparently ought to go as it may affect many Israelis who relocate abroad.
First, Israel’s tax treaty is not with England, it is with the United Kingdom of Great Britain and Northern Ireland.
Second, the Article on pensions in the Israel-UK tax treaty is not 17(1), it is Article 11….. It should be noted that Article 17 deals with students and apprentices, not pensions.
Third, the Israel-UK tax treaty says that: “pensions and other similar remuneration paid to an individual who is a resident of one of the territories (i.e. countries), shall be taxable only in that territory.” The only except is for pensions paid in respect of services in the discharge of governmental functions, i.e. embassy staff – not relevant in most cases.
In other words, the Israel-UK tax treaty lets the UK tax UK residents on Israeli pensions paid to UK residents regardless of where the taxpayer worked when generating the amounts paid into the Israeli pension fund.
Fourth, tax treaties override the domestic law. Section 4A(8) of the Israeli Income tax Ordinance says that a pension, payout or annuity arises in the country of the payor but Section 196 says that treaties apply notwithstanding any other enactment.
It remains to be seen what the Courts will decide. A key issue is what would happen in the converse case? Will immigrants to Israel (Olim) who receive pensions from their old country suddenly start to owe foreign tax on them? That is generally not the case at present.
What should you consider doing?
First, always get confirmation of fiscal residency in the country concerned. Second, watch out for the final decision in this case. Third, consider leaving your Israeli pension in the pension fund until you retire. You may need it more then…
As always, consult experienced tax advisors in each country at an early stage in specific cases.
(c) Leon Harris 22.12.25