A foreign resident employee who performs work within Israel’s borders may be subject to tax in Israel, whether employed by an Israeli employer or by a foreign employer. The application of a tax treaty, as well as withholding and reporting obligations, also depends on the circumstances of the employment.
The taxation of a foreign resident on employment income in Israel is determined mainly by the place where the work is performed and the circumstances of the employment. The employee’s citizenship, the place from which the salary is paid and the place where the agreement is signed do not, by themselves, determine the tax liability.
Who is considered a foreign resident for tax purposes?
The starting point is that citizenship and tax residency must be distinguished. A person may hold Israeli citizenship and still be considered a foreign resident for tax purposes. Conversely, a person who is not an Israeli citizen may be considered an Israeli resident if their center of life is in Israel.
The Income Tax Ordinance defines a foreign resident, first and foremost, as a person who is not an Israeli resident. In addition, it provides a route under which an individual will be considered a foreign resident if they stayed outside Israel for at least 183 days in each of the tax year and the following tax year, and their center of life was not in Israel during the two tax years that followed.
The Ordinance sets out two presumptions of Israeli residency: staying in Israel for 183 days or more during the tax year, or staying in Israel for at least 30 days during the tax year and for a total of at least 425 days during that tax year and the two preceding years. These presumptions may be rebutted. The substantive test is the center of life test.
The center of life test examines the person’s overall ties, including place of residence, family, work, assets, and social and economic connections.
Where a tax treaty exists between Israel and the other country of residence, it may also include tie-breaker rules for determining the country of residence in cases of dual residency.
*Section 1 of the Income Tax Ordinance authorizes the Minister of Finance, with the approval of the Knesset Finance Committee, to prescribe regulations setting conditions under which certain individuals will be treated as Israeli residents, or will not be treated as Israeli residents. In addition, the regulations include special arrangements for defined categories, including diplomats, students and teaching staff. See: Income Tax Regulations (Determination of Individuals Who Shall Be Treated as Israeli Residents and Determination of Individuals Who Shall Not Be Treated as Israeli Residents), 2006.
A foreign expert or visiting lecturer may be entitled to deduct certain accommodation expenses, subject to the conditions and caps prescribed in the regulations. This is a deduction of expenses, not a tax exemption. Separate provisions may apply to foreign journalists and foreign athletes.
For more information, we recommend reading the article “Taxation of Foreign Residents”.
When is a foreign resident liable to tax in Israel on employment income from work performed in Israel?
Under Section 2 of the Income Tax Ordinance, a foreign resident may be liable to tax in Israel on income produced or accrued in Israel. Under Section 4A of the Ordinance, the place where employment income is produced is the place where the work is performed. Therefore, salary attributable to workdays performed in Israel may be taxable in Israel, even where the employee is employed by a foreign company and the salary is paid outside Israel. If the work is performed partly in Israel and partly in another country, it is necessary to examine how the salary should be allocated to the workdays in each country.
Section 131(a)(4) of the Income Tax Ordinance provides that a foreign resident who had taxable income in Israel during the tax year is required to file a report (annual tax return) with the Israel Tax Authority.
However, if the foreign resident is a resident of a country with which Israel has signed a double tax treaty, specific tax provisions will apply under the relevant treaty. As a result, there may be situations in which the employee is exempt from paying tax in Israel. Reporting obligations and possible exemptions depend on the circumstances and the applicable law.
To check whether Israel has a tax treaty with a specific country, click here.
Tax treaty rules regarding employment income
Tax treaties may grant the country of residence exclusive taxing rights and provide an exemption from tax in Israel under the treaty, if the conditions set out in the treaty are met. The conditions vary from treaty to treaty, but they usually include the following cumulative conditions:
- The employee did not stay in Israel for more than 183 days.
- The salary is paid by a foreign employer and not by an Israeli employer.
- The salary cost is not borne by a permanent establishment of the employer in Israel.
Please note: In the United States, there is an additional condition – the salary must be subject to tax in the employee’s country of residence.
Who is considered the employer for tax treaty purposes?
For purposes of examining the treaty conditions, it is not always enough to identify who signed the employment agreement or who pays the salary. It is also necessary to examine who actually manages the employee, who benefits from the employee’s work and who bears the salary cost. Therefore, an employee who is employed by a foreign company but in practice works for an Israeli company may fail to meet the treaty conditions.
Taxation of a foreign resident on employment income in Israel for an Israeli employer
A foreign resident who works in Israel for an Israeli employer is not entitled to an exemption or relief under a tax treaty. Therefore, the salary attributable to work performed in Israel is taxable in Israel, subject to the applicable law and the circumstances of the employment. The Israeli employer must examine its withholding tax and reporting obligations, as well as its National Insurance obligations. The law in the relevant foreign country should also be reviewed, including the possibility of obtaining a credit or relief for tax paid in Israel in order to prevent double taxation.
Taxation of a foreign resident on employment income in Israel for a foreign employer
Where a foreign resident works in Israel for a foreign employer, the place where the salary is paid or the identity of the foreign company does not, by itself, rule out tax liability in Israel. If the employee meets the exemption conditions set out in the relevant tax treaty, the employee’s income from work performed in Israel may be exempt from tax in Israel.
If the employee does not meet the exemption conditions set out in the relevant tax treaty, the salary attributable to work performed in Israel may be taxable in Israel, in accordance with the applicable law. The withholding and reporting obligations of the employer and the employee should be reviewed, as well as National Insurance obligations, based on the circumstances of the employment. If the employee also paid tax in their country of residence, it is necessary to examine whether, under the laws of that country, the employee is entitled to a credit or refund for the tax paid in Israel.
What is a permanent establishment and why is it important?
A permanent establishment is, in general, a fixed place of business through which a foreign company carries on business in a country. The activity of an employee may also create a permanent establishment in certain circumstances. A senior position or authority to sign contracts does not automatically create a permanent establishment. The actual activity and the relevant treaty must be examined.
If the company’s activity in Israel creates a permanent establishment, the company may become liable to tax on the profits attributable to the activity in Israel, as well as to registration and reporting obligations.
How should companies prepare for employing a foreign resident?
Before the work begins, the employee’s tax residency, the countries in which the employee will work and the expected duration of the employee’s stay in Israel should be clarified. It is also important to identify who actually manages the employee’s work, who bears the salary cost and whether additional group companies are involved.
Next, Israeli law, the relevant tax treaty and the withholding, reporting and registration obligations should be reviewed. It is also necessary to examine whether the employee’s activity may create a permanent establishment for the employer in Israel.
The employment agreement, tax residency certificate, payslips, records of workdays and travel, and documents relating to intercompany charges should be retained. This documentation may assist in examining the place where the work was performed and compliance with the treaty conditions.
Alongside the tax aspects, immigration and employment requirements should also be reviewed, including the need for a work visa or an appropriate permit, as well as National Insurance and health insurance obligations.
Investors and foreign companies planning activity in Israel should also examine in advance the employment structure, labor law issues and the need for work permits for employees from abroad. Employing workers in Israel may require compliance with local labor laws, payroll reporting and National Insurance and health insurance payments.
Why is it important to review the tax liability before the work begins?
The taxation of a foreign resident on employment income in Israel depends on the place where the work is performed, the conditions of the tax treaty and the actual employment structure. Early review and proper documentation help identify tax and reporting obligations and reduce disputes later on.
Nimrod Yaron & Co. specializes in Israeli and international taxation and advises companies, employers and employees on cross-border tax matters, including the employment of foreign residents in Israel, the application of tax treaties, withholding tax, reporting obligations, and permanent establishment and Value Added Tax (VAT) aspects. Before starting work in Israel or outside Israel, it is advisable to carry out an early review of the employment structure, tax liability and reporting obligations.
Frequently Asked Questions
Does staying in Israel for less than 183 days automatically exempt an employee from tax?
No. The 183-day condition is only one of the possible conditions under many tax treaties. It is also necessary to examine who the actual employer is, who bears the salary cost, whether there is a permanent establishment in Israel and the wording of the relevant treaty.
Is there a withholding tax obligation when the salary is paid from abroad?
Even when the salary is paid from abroad, withholding tax, reporting or registration obligations may arise in Israel. These obligations depend, among other things, on the identity of the substantive employer, the identity of the paying entity, the place where the work is performed and the actual employment structure.
Does Israeli citizenship make a person an Israeli resident for tax purposes?
No. Tax residency is determined according to the center of life test and the day-count presumptions set out in law, and not by citizenship alone. Therefore, even an Israeli citizen may be considered a foreign resident for tax purposes.
Does employing an employee in Israel require a foreign company to pay tax in Israel?
Not necessarily. The mere employment of an employee in Israel does not require a foreign company to pay tax in Israel. If a tax treaty applies between Israel and the company’s country of residence, it is necessary to examine whether the company’s activity in Israel creates a permanent establishment under the terms of the treaty. For this purpose, the employee’s role and the authorities granted to the employee are examined, among other things.
What documents should a foreign resident keep while working in Israel?
It is recommended to keep the employment or services agreement, tax residency certificate, payslips, attendance and travel records, and documents relating to charges between related companies. This documentation may assist in supporting the tax position and proving compliance with the treaty conditions.
Can working in Israel for only a few days create tax liability?
Not always, but even a short stay may be relevant. It is necessary to examine the place where the work is performed, the tax treaty conditions, the identity of the actual employer and who bears the salary cost.
Does hybrid work in Israel and abroad require salary allocation?
In practice, salary should be allocated to the workdays performed in each country. An employee who divides their time between Israel and another country should keep documentation of workdays and travel.
The question is not only how many days the employee stayed in Israel, but also what the employee did on each day, for whom, and in what business context. Maintaining an organized travel log, keeping flight tickets and recording workdays are basic tools for reducing disputes later on.
Can a foreign resident working in Israel obtain an advance tax ruling from the Israel Tax Authority regarding their tax liability?
In complex cases, it is possible to consider applying for an advance tax ruling, especially where there is uncertainty regarding the employment structure, tax liability or the application of a tax treaty.
Is a foreign resident working in Israel for a foreign employer exempt from tax in Israel?
A foreign resident may be liable to tax in Israel because the work was performed in Israel. An exemption or relief under a tax treaty depends on the treaty conditions and the circumstances, including the duration of the stay, the identity of the actual employer and who bears the salary cost.
