Relocation from Israel Abroad

What does the relocation process include?

The relocation process includes several essential stages. First, a thorough examination of the destination country is necessary to consider key factors such as employment opportunities, living costs, tax system, education, social security, healthcare services, and other important aspects.

Additionally, you must arrange your legal status in the destination country – obtaining work permits, visas, or permanent residency. At the same time, it’s important to plan how to manage your finances and assets, as well as arrange health insurance and social rights, to ensure a safe and smooth transition.

Finally, you must of course examine where your center of life is and decide whether to terminate your residency in Israel, both for tax purposes and for social security purposes, and the resulting implications.

Tax Aspects of Relocation

Termination of Tax Residency

One of the main issues in the relocation process is terminating your residency for tax purposes. In Israel, Israeli residents are taxed on their worldwide income, while non-residents are taxed only on income sourced in Israel. Residency status is determined according to your “center of life,” which is examined using both qualitative and quantitative tests.

Center of Life Test – According to the Income Tax Ordinance, an Israeli resident is someone whose center of life is in Israel. This test examines the individual’s family, economic, and social ties are examined.  These include a permanent place of residence, a place of economic activity, a location of economic interests, and more.

Days test – Alongside the center of life test, there is an auxiliary test establishing quantitative presumptions (which can be refuted). According to this test, if a person stayed in Israel during the tax year for 183 days or more, or if a person stayed in Israel during the tax year for more than 30 days, and their total stay in Israel during the tax year and the two preceding years exceeds 425 days. This presumption is that the individual is an Israeli resident. As mentioned, these quantitative presumptions can be refuted if the taxpayer proves that their center of life is outside Israel.

If you intend to settle in a country for the long term, it may be preferable to disconnect your residency from Israel (both for income tax and social security).

An individual who meets the day count presumption, meaning they are considered an Israeli resident according to this test, must submit Form 1348 to the tax authority – “Declaration of Residency.” This is to declare the termination of residency and detail the circumstances supporting that their center of life is not in Israel.

It is important to note that terminating tax residency is usually not a one-time event but an ongoing process, and the tax authority may examine the individual’s residency status even years after departure. Therefore, it is recommended to keep detailed documentation of all actions indicating the transfer of the center of life to the foreign country and to avoid creating new ties to Israel.

Additionally, it should be noted that Israeli residents who terminate their residency are subject to an “exit tax” on their assets, except for certain assets located in Israel. This tax is calculated on the theoretical profit accumulated until the day of residency Termination, and there are several options for paying the tax – immediate payment, deferring payment until the actual sale of the assets, or spreading the payment over several years.

Tax Treaties

Israel has signed treaties to prevent double taxation with many countries. These treaties are designed to prevent a situation where a person pays double tax on the same income. The treaties regulate issues such as determining residency in case of dual residency, tax rates on passive income (dividends, interest, and royalties), taxation of employment income, and more.

Click here to check if there is a treaty between Israel and your destination country.

Tax System in the Destination Country

The tax system in the foreign country may be fundamentally different from the Israeli one. In Israel, the taxation system is mixed (personal and territorial). There are countries where a territorial taxation system is practiced, taxing only income generated within the country’s borders, while in other countries, like the USA, taxation is personal, requiring reporting and paying tax on income from around the world.

It’s also important to know the income tax brackets in the destination country, the different tax rates applicable to various types of income (employment, investments, capital gains), as well as additional taxes such as VAT, real estate tax, corporate tax, and inheritance tax.

Pension and Savings

You should examine the implications of the move on pension savings, provident funds, and advanced training funds. In certain cases, these funds can be withdrawn tax-free or at a reduced tax rate, but you should examine the tax implications of withdrawing money from provident funds and advanced training funds after terminating residency in the destination country as well.

Assets and Inheritances

If you wish to acquire assets in the destination country, you should consider the implications regarding taxation, asset management, and inheritance. It is recommended to prepare a will that addresses assets in both countries. Inheritance laws vary from country to country, and without proper planning, legal and tax complications may arise.

For more information on taxation of inheritances from abroad, click here.

Social Security

An Israeli resident staying abroad is required to pay reduced social security contributions. If they have terminated their residency, they are not required to pay social security contributions but are also not entitled to health services and social rights in Israel.

Israel has signed social security agreements with several countries, regulating residents’ rights in areas such as old-age pensions, disability, survivors, and children’s benefits. It’s important to check if such an agreement exists with the destination country and what it means for you.

Residence Permits

One of the central challenges in relocation is obtaining a residence permit. Different countries offer various options: work visa, investor visa, retiree visa, digital nomad visa, and sometimes even citizenship or residency by investment programs. Each type of visa has different requirements – age, income, minimum investment, employment contract, health insurance, and more.

Money Transfers from Israel to the Destination Country

When relocating from Israel abroad, you should examine the various options for transferring money abroad – bank transfers, international credit cards, etc. Each option has advantages and disadvantages in terms of fees, transfer times, amount limitations, and regulations. Pay attention to reporting requirements to authorities and banks, in accordance with anti-money laundering laws and international regulations (FATCA, CRS). Also, it’s advisable to open a bank account in the destination country in advance.

For more information on this topic, read the article “Money Transfers from Israel Abroad“.

Returning to Israel

When returning to Israel, you should examine the tax and insurance implications: rights as a regular or veteran returning resident, tax exemptions on income and capital accumulated abroad, waiting period for health services, renewal of social security rights, and benefits from the Ministry of Absorption.

In summary, relocation to a foreign country is a complex process, requiring professional planning, personal guidance, and a deep understanding of all aspects. Nimrod Yaron & Co. specializes in guiding Israelis through relocation processes, providing solutions in all tax aspects. Our team of experts provides personalized strategic tax advice and guidance in the process of terminating residency with the tax authorities, including preparing all required documents and dealing with questions and examinations by the tax authorities. Additionally, we advise on managing assets in Israel and abroad, represent clients before tax authorities, and assist in inheritance planning and intergenerational transfers.