Tax authority sets out new ruling for Israelis who relocate abroad

The tax authority has issued a new ruling meant to ease taxation procedures for Israelis relocating abroad, though a tax expert says the new framework is still very strict compared to how existing Israeli law could be interpreted.

Earlier this week the authority issued tax guidelines setting out the criteria for how Israelis living abroad should be taxed on the salary they earn while abroad. If the workers are still considered Israeli residents, their company needs to pay withholding tax in Israel, but if they are not considered residents, then the company does not need to withhold taxes in Israel. The new rules differ from the framework set out by the tax authorities in 2014.

“There is always uncertainty in practice as to who is considered a resident or not, so the tax authority set out to put some order in defining residency,” said Binyamin Tovi, advocate and CPA at the Shekel & Co. law firm in Tel Aviv, in charge of the firm’s international taxation department. “If certain terms are met, then you are considered a foreign resident.”

According to figures provided by Ogen, a relocation company operating in the US and Israel, there are some 50,000 Israelis living in the Silicon Valley area, based on figures provided by the Israeli consulates. And an estimated 20,000 Israelis relocate overseas every year for fixed periods ranging from a few months to several years, according to data cited by the financial website Globes.

Binyamin Tovi, advocate and CPA at the Shekel & Co. law firm in Tel Aviv (Courtesy)

The new ruling says that workers who have been living abroad for at least three years are considered foreign residents. In addition, their families have to be living abroad with them for at least 2.5 years. While they are abroad, they can visit Israel for 75 days a year and their family can visit Israel for 85 days a year.

In the former 2014 ruling both the workers and their families had to be abroad for at least 3 years to be considered foreign residents and they could visit Israel for just 65 days (the workers) and 80 days (their families) respectively.

“There is a certain relaxation versus the previous tax ruling of 2014,” said Tovi. “However, the Israeli law regarding residency has been interpreted by the Israeli courts in a more liberal way than it is being interpreted by the Israeli tax authorities, as reflected in the latest tax ruling.”

“The ruling is actually takes a harsh interpretation of the existing law,” he said.

Yaniv Erlich, head of the tax department at GKH Law Offices in Tel Aviv, said the ruling is not exactly a relaxation of the rules, but rather an attempt to clarify who is considered a resident and who is not in accordance with the view of the professional department of the Israeli Tax Authority.

Yaniv Erlich, head of the tax department at GKH Law Offices in Tel Aviv (Credit: Osnat Rom)

The frameworks are provided for those workers and companies who want to get their taxation issues in order before going abroad, said Yaniv Erlich, head of the tax department at GKH Law Offices in Tel Aviv.

“There is no obligation to do this ahead of time,” he said. “Each case should be determined based on its own merits. The workers and their employers can decide between themselves whether they should obtain an advance tax ruling or take an independent position determining whether tax should be withheld at source or not and where.  Any future Israeli tax issues can still be resolved vis a vis the tax authorities once the workers return to live in Israel.”