Tax and Reporting Obligations of Foreign Residents in Israel
When Is a Foreign Resident Liable to Tax in Israel?
Under the Israeli Income Tax Ordinance, an Israeli resident is generally liable to tax in Israel on worldwide income. A foreign resident is generally liable to tax in Israel on income derived from Israeli sources. The source of income is determined according to the type of income and the circumstances in which it is generated: employment income is usually connected to the place where the work is performed, business income to the place of activity, and income from an asset in Israel to the location of the asset. Dividends, interest, capital gains, and options may also be subject to tax in Israel or create reporting obligations, depending on the circumstances.
Who Is Considered a Foreign Resident Under the Income Tax Ordinance?
It is important to distinguish between two situations. A person who has always been a foreign resident, such as a British citizen who derives income in Israel, must mainly examine whether that income is taxable in Israel. By contrast, an Israeli who moved to the United Kingdom and continues to derive income from Israel must first examine whether he or she is indeed considered a foreign resident for tax purposes. If Israeli tax residency has been severed, the tax rules that apply to foreign residents will generally apply. If the individual is still considered an Israeli resident, he or she may be liable to tax in Israel on worldwide income.
The distinction between an Israeli resident and a foreign resident for tax purposes is determined according to the center of life test and the number of days spent in Israel. Under the center of life test, all of the individual’s connections are examined, including the place of residence of the individual and his or her family, place of work or business, assets, bank accounts, and economic and social interests. Alongside this test, the Income Tax Ordinance sets rebuttable day-count presumptions: presence in Israel for 183 days or more in the tax year, or presence in Israel for 30 days or more in the tax year and a total of 425 days or more in that tax year and the two preceding tax years. The number of days spent in Israel is a significant factor, but it is not decisive on its own. The determination is made after examining the individual’s overall connections to Israel and to the other country of residence.
Foreign Company and Tax Residency in Israel
A company incorporated outside Israel may be considered an Israeli tax resident if the control and management of its business are exercised in practice from Israel. The Israel Tax Authority examines where the company’s decisions are made, who actually manages the company, where day-to-day management takes place, and where the key officeholders operate. A foreign address, a bank account abroad, or foreign directors are not decisive in and of themselves. Where the controlling shareholders of the company are Israeli residents, the possible application of the Controlled Foreign Corporation (CFC) rules or the Foreign Professional Company rules should also be examined. These rules may attribute certain income of the foreign company to the controlling shareholders in Israel, subject to the conditions set out by law.
For further reading, see the article “Determining the Tax Residency of a Company”.
Possible Tax Benefits for Foreign Residents
Israeli law provides, in certain cases, exemptions and reliefs intended to encourage investments by foreign residents in Israel. A foreign resident may benefit from an exemption or tax relief on capital gains from the sale of securities traded on the Israeli stock exchange, subject to the conditions set out by law and provided that the gain is not connected to a permanent establishment in Israel. The exemption does not necessarily apply to every sale of a security, and the type of asset, the identity of the holder, the nature of the holding, and the connection to business activity in Israel must be examined. Interest on a foreign-currency deposit in an Israeli bank may also be exempt from tax under certain conditions. Eligibility depends on the circumstances, the type of investment, and the documents provided to the financial institution.
Eligibility for a tax exemption varies according to the type of investment, the identity of the investor, and the conditions under the law or the applicable tax treaty. Dividends from an Israeli company, interest, royalties, and other income may be subject to tax in Israel, even if a reduced rate may be requested under a tax treaty.
Foreign resident status affects the scope of tax liability in Israel and eligibility for certain tax reliefs. A foreign resident generally does not report in Israel income that was derived outside Israel and has no connection to Israel. On the other hand, income from an asset, investment, or activity in Israel may be subject to tax, withholding tax, or reporting to the Israel Tax Authority.
Tax Treaties and Permanent Establishment in Israel
Tax treaties for the prevention of double taxation determine how taxing rights are allocated between Israel and the taxpayer’s country of residence. When a foreign company that is a resident of a country with which Israel has a tax treaty derives business profits, Israel will generally be able to tax profits attributable to a permanent establishment in Israel. This depends on the wording of the treaty and the facts of the case. Where there is no treaty, the liability is examined under Israeli law and the place where the income is derived.
A permanent establishment may arise when a foreign company has a fixed place of business in Israel, such as an office, store, factory, or branch, and conducts business activity from it. It may also arise through a dependent agent in Israel who enters into contracts on behalf of the company or plays a principal role in arrangements that the company routinely approves. In the case of a construction site, assembly project, or installation project, the period of activity specified in the relevant treaty should be examined.
Regular work from home in Israel for a foreign company may also raise the question of a permanent establishment. The analysis depends on the scope of the work, the nature of the role, the employee’s authority, and the business reason for the employee’s presence in Israel. The number of working days or the wording of the employment agreement is not decisive on its own.
An employee who performs internal work only, without a connection to the Israeli market and without commercial authority, may create lower exposure. The picture changes when an employee regularly operates from Israel vis-a-vis customers, manages suppliers, conducts negotiations, or makes business representations on behalf of the company.
Real Estate Taxation for Foreign Residents
A foreign resident who invests in real estate in Israel should take into account purchase tax upon acquisition, tax on rental income, and land appreciation tax upon sale. When purchasing a residential apartment, a foreign resident is generally not entitled to the purchase tax brackets for a single residential apartment that are available to Israeli residents. When selling property in Israel, an online declaration must generally be filed with the Real Estate Taxation Authority within the deadline prescribed by law. Anyone seeking an exemption or tax benefit upon the sale of a residential apartment should examine the conditions and the documents required by the Israel Tax Authority, including proof of the conditions relating to a residential apartment in the country of residence, where required.
Taxation of Shares, Securities, and Options for Foreign Residents
An employee or officeholder who is a foreign resident and received options or shares from an Israeli company should examine the grant date, exercise date, periods of work in Israel and abroad, and the allocation track. The analysis becomes more complex when the employee moved abroad after the grant or worked in several countries at the same time.
A foreign resident who invests in shares, bonds, funds, or other Israeli securities should examine the tax on dividends, interest, and the sale of the investment. The outcome depends on the type of asset, the circumstances of the holding, Israeli law, and the applicable tax treaty, if any.
Withholding Tax, Passive Income, and Tax Treaty Relief
Banks and paying entities in Israel generally withhold tax at source from interest, dividends, royalties, and similar payments. An Israeli company that pays management fees or consideration for services to a foreign resident may also be required to withhold tax at source. The withholding rate depends on the type of income, Israeli law, and the relevant tax treaty.
To obtain relief under a tax treaty, a foreign resident must meet the treaty conditions and follow the required procedure with the Israel Tax Authority. The foreign resident will generally be required to present a current certificate of tax residency from the country of residence and documents supporting eligibility. In corporate groups, the identity of the true beneficial owner of the payment should also be examined. In real estate transactions, the parties should examine in advance whether tax approvals are required in order to avoid a delay in payment of the consideration to the seller.
A foreign resident who holds an investment account in Israel should make sure that the withholding tax is consistent with his or her circumstances. In some cases, it is possible to request relief under a tax treaty or a tax refund. Anyone who conducts business in Israel, leases property, sells real estate, holds an active Israeli company, or seeks a tax refund should examine the reporting obligations and filing deadlines in advance. It is advisable to keep certificates of tax residency, information regarding income and withholding tax, and relevant agreements.
Value Added Tax in Transactions with Foreign Residents
A service provided by an Israeli dealer to a foreign resident may be subject to Value Added Tax (VAT) at a zero rate, subject to the conditions of Section 30 of the Value Added Tax Law, 5736-1975. The fact that the recipient of the service is a foreign resident is not sufficient in and of itself. It is necessary to examine who actually receives the service, where it is provided, whether it is also provided to an Israeli resident, whether it is connected to an asset in Israel, and how it relates to activity in Israel. A zero-rated transaction may allow the dealer to deduct input tax, subject to the law. Different rules apply to an exempt transaction.
Tax Reporting for Foreign Residents in Israel
A foreign resident should examine his or her reporting obligation according to the type of income, the scope of activity, the existence of a business or permanent establishment in Israel, the withholding tax, and any request for a tax benefit or tax refund. Income from a business, salary, dividends, or another source in Israel may require the filing of an annual tax return if the full amount of tax was not withheld at source. An individual may be required to file Form 1301, and a foreign company may be required to file reports and forms according to the structure and classification of its activity. An Israeli who moved abroad and wishes to establish foreign resident status for tax purposes may be required, in appropriate cases, to attach Form 1348 – Declaration of Residency – in accordance with the Israel Tax Authority’s instructions and the individual’s circumstances.
Rental Income from Property in Israel
A foreign resident who leases a residential apartment in Israel may consider several tax tracks. Eligibility for a tax exemption is subject to special conditions that apply to foreign residents. Subject to the conditions under the law, it is possible to consider an exemption track, a 10% tax track on gross income, and a tax track based on tax brackets. Under the 10% track, current expenses or depreciation cannot be deducted. Under the tax bracket track, deductible expenses may be taken into account, but opening a tax file and filing Form 1301 are generally required.
Tax Planning for Foreign Residents Before Investing or Conducting Activity in Israel
Before investing or conducting activity in Israel, it is advisable to examine tax residency, the source of income, the nature of the activity, the holding structure, withholding tax, and reporting obligations. The review may also include permanent establishment issues, investments in securities, options, real estate, VAT, and a tax treaty.
Anyone who holds an asset, investment, or company in Israel should examine tax and reporting obligations at an early stage. Before purchasing an asset, investing in a company, trading in securities, receiving options, or commencing activity in Israel, it is recommended to hold a consultation meeting in order to map the exposures and required documents.
Nimrod Yaron & Co. advises individuals, investors, and companies on matters involving the taxation of foreign residents, tax residency, tax treaties, permanent establishment, investments, and real estate in Israel. Before making a decision, an investment, or a filing with the Israel Tax Authority, it is recommended to obtain tailored advice based on the circumstances of the case.
Frequently Asked Questions
Is a foreign resident liable to tax in Israel on all income?
Generally, Israel taxes a foreign resident on income derived from Israeli sources. The outcome depends on the type of income, the law, and the relevant tax treaty, if any.
Must a foreign company establish an Israeli company in order to operate in Israel?
A foreign company may sometimes operate in Israel without establishing a local company, but it should examine the tax, VAT, and reporting implications in advance.
Does a foreign resident need a certificate of tax residency to benefit from relief under a tax treaty?
In many cases, yes. A foreign resident seeking a reduced tax rate or other relief under a tax treaty is generally required to present a current certificate of tax residency from his or her country of residence. The treaty conditions and the Israel Tax Authority’s requirements should also be examined.
Can visits by a director of a foreign company to Israel create a permanent establishment?
Occasional visits by a director of a foreign company to Israel are generally not sufficient in and of themselves to create a permanent establishment. The frequency of the visits, the nature of the activity, the director’s authority, involvement in negotiations or engagements, and the contribution of the activity in Israel to the generation of income should be examined.
What are the reporting obligations of a foreign resident with income in Israel?
The reporting obligation depends on the type of income, the scope of activity, the existence of a business or permanent establishment in Israel, the withholding tax, and any request for a tax benefit or tax refund. A foreign resident who conducts business in Israel, leases property, sells real estate, holds an active Israeli company, or seeks a tax refund should examine the reporting obligations and filing deadlines.
Is an employee who moved abroad and exercised options from an Israeli company liable to tax in Israel?
Possibly. The terms of the option plan, the grant and exercise dates, the periods of work in Israel and abroad, the source of the income, and the relevant tax treaty should be examined. Moving abroad does not necessarily eliminate Israeli tax liability in respect of options granted in connection with work performed in Israel.
Is a foreign resident who holds Israeli shares required to file a tax return in Israel?
The reporting obligation of a foreign resident who holds Israeli shares depends on the type of income, the manner in which tax is withheld at source, the scope of activity, the tax treaty, and additional circumstances. A request for a tax refund or for relief under a tax treaty may require a filing or an application to the Israel Tax Authority.
Is a foreign resident who leases an apartment in Israel liable to tax?
Income from leasing property in Israel may be subject to tax. The appropriate tax track, the possibility of deducting expenses, and the reporting obligations should be examined.
Can a foreign resident receive a tax refund in Israel?
In appropriate cases, yes. The possibility of receiving a refund depends on the tax withheld at source, the type of income, deductible expenses, eligibility for a benefit, and the provisions of the tax treaty.
Is a foreign resident who holds an apartment in Israel required to file an annual tax return?
The mere purchase or holding of an apartment generally does not create an obligation to file an annual tax return in Israel. Leasing the apartment or selling it may create payment and reporting obligations, depending on the circumstances of the case and the tax track selected.
