Tax Authority toughens rules on Israelis relocating abroad
Even Israelis residing overseas for three years are being required to pay tax in Israel on their income during that period.
Quite a few Israelis who emigrated from Israel, lived abroad for certain periods, and did not report their income there, claiming that they are not residents of Israel, have found themselves in recent years frequenting the corridors of the Israel Tax Authority. They have had to try to explain to the tax assessment officials that they are not obligated to pay tax in Israel. Super-model Bar Refaeli is the most famous example – a symbol of the Tax Authority’s campaign. Not only was she issued a civil tax assessment for millions of shekels that she had earned, but she was summoned to the Tax Authority for a criminal investigation on suspicion of falsely telling the Tax Authority that she had been living overseas for years, while according to the Tax Authority, she had been actually living in Tel Aviv. The Tax Authority asserts that in this way, she evaded paying taxes on millions of shekels. Refaeli denied the charges, and is currently conducting a civil campaign to prove her innocence.
Another billionaire who has been contending with the Tax Authority in recent years about his residence for tax purposes is Beny Steinmetz. For a certain period in his life, Steinmetz decided to spend most of the year on his yacht in the open sea, thereby avoiding residence in Israel. Steinmetz currently resides solely in Israel, following an investigation alleging that he committed bribery in Guinea. His dispute with the Tax Authority about his past income, however, is still relevant.
The wealthy and the famous are not the only ones finding themselves embroiled in disputes with the Tax Authority concerning a period of working overseas. An estimated 20,000 Israelis relocate overseas every year for fixed periods ranging from a few months of several years. Most of the employees are sent directly by the companies that employed them in Israel, while others leave independently to work for foreign companies. Many of them who jump at the chance to conquer the world, however, are unaware of the tax aspects that are liable to overshadow their triumph. Over the years, many of them have been surprised to receive a huge tax assessment upon their return to Israel.
By law, an Israeli resident residing overseas owes tax in Israel on his income. This means that in addition to the tax he pays overseas, or that the company employing him deducts for him there, he has to pay more tax in Israel. In various cases, it has emerged that an employee relocating overseas who paid 25% tax to the country where he worked has had to pay 50% in Israel, and sometimes even more.
Tougher terms for severing residence
The issue has been unclear for years, and a number of legislative amendments and courts tried to bring order into this disorder. A new pre-ruling published last week by the Tax Authority expresses a clear and explicit position concerning the sending of employees overseas by Israeli companies – a stance that many of the candidates for overseas work will not like. According to tax experts, the Tax Authority’s decision imposes Israeli taxation on many Israelis actually outside Israel. The last time a similar decision about relocation was published was in 2014. The dimensions of the relocation phenomenon have since grown, and the amount of tax demanded by the Tax Authority has grown accordingly.
The Tax Authority’s decision concerns a large Israeli company that sends its employees to countries that have signed conventions in Israel for prevention of double taxation, sometimes accompanied by their spouses and children. In its inquiry to the Tax Authority, the Israeli company said that these employees were being sent abroad for at least 36 months, come to Israel for only short visits, and that the company helps them to find permanent housing when they go overseas. These employees report their income to the tax authorities in the target country. Under these circumstances, the company asked the Tax Authority to set a date for severing the Israeli residence of its employees according to the conventions for preventing double taxation.
In its answer to the company, the Tax Authority made it clear when it regards an employee sent overseas as not subject to tax in Israel. According to tax expert Advocate Itay Bracha, this amounts to a substantial extension of the Tax Authority’s front. “In its taxation decision, the Tax Authority is making demands that it never did before,” Bracha states.
Bracha explains, “The demands that the Tax Authority is now making constitute a further toughening of the conditions that it sets for severing the Israeli residence of relocation employees. This is the opposite of the trend that has appeared in rulings in recent years, which eased the conditions. For example, it was ruled that a person could be recognized as a foreign resident even if he did not spend a majority of his time outside Israel with his family. In any case, people leaving for overseas relocation must carefully consider their legal situation before and after leaving in order to avoid serious tax accidents.”
