By KTA News Team |

Any Israeli considering immigration abroad should examine the tax implications associated with their work and assets both in Israel and in their destination country.

For a post regarding “Income Tax for Foreign Expert and Benefits: What Do You Need To Know”, please click here

The tax implications for a person depending on their place of residence, source of income, and location of assets. A resident of Israel is subject to tax on all of their worldwide income and will continue to be taxed on any income generated abroad as long as they remain a resident of Israel.

Determining who is a resident of Israel for tax purposes can be complex and is based on various factors, including their place of residence, family connections, place of work, and location of assets. To completely sever ties with Israel, individuals may need to resign from their job, sell or rent their apartments, sell their cars and other possessions, and focus on building personal and family connections outside of Israel.

There are two numerical presumptions used to determine residency in Israel for tax purposes

  1. If a person spends 183 days in Israel in a tax year or
  2. iI they spend 425 days in Israel over three consecutive years and 30 days in the current year.

However, even if these criteria are met, a person can still prove that their center of life is outside of Israel. It is important to note that even part of a day in Israel is considered a full day for the purpose of determining residency, and individuals who have spent time in Israel in previous years may still be considered residents.

A resident of Israel must continue to report their income generated outside of Israel to the Israeli tax authorities, while a person who is not a resident of Israel is not required to report their foreign income but may still need to report any income generated in Israel (such as rental income). Individuals who meet the numerical criteria for residency but claim to not be residents must submit an application detailing why they are not residents for tax purposes.

Exit tax applies to individuals who are no longer considered residents of Israel and are not taxed on their foreign income but may still be taxed in Israel on the sale of assets in Israel and abroad that they owned prior to leaving Israel. The exit tax is intended to prevent individuals from leaving Israel to avoid paying taxes on assets acquired while they were residents. The individual can either pay the exit tax at the time of their exit based on the market value of the assets or pay the tax proportionally when the assets are sold.

Regarding Employee Stock Options (ESOP) in the case of relocation, the exit tax also applies to options received by employees while working in Israel and prior to their migration abroad. However, the tax implications in both Israel and the new country of residence must be carefully examined, as there may be potential for tax savings. Possible approaches to dividing the tax between Israel and the new country of residence include dividing the taxable income based on the holding period or dividing the profit based on vesting periods. However, the strict position of the Israeli tax authorities is to tax the entire profit in Israel, with the employee receiving a tax credit for the portion of their work performed abroad. This position may not align with the provisions of the law and the tax treaty.