Exit tax may apply when relocating or moving permanently abroad, where an individual ceases to be an Israeli tax resident. In this article, we review the principles of exit tax, the importance of the date on which tax residency is severed, and the recommended checks regarding assets and investments before the move.
Under Section 100A of the Income Tax Ordinance, an individual who ceases to be an Israeli resident may be deemed to have sold certain assets on the day before severing Israeli tax residency. Through this arrangement, Israel seeks to tax the portion of the gain that accrued during the period of Israeli residency, even if the actual realization takes place at a later stage and in another country. This is a deemed sale, not a sale in which actual consideration is received.
If the tax is not paid at that time, Section 100A provides a mechanism under which the taxpayer is deemed to have requested to defer payment of the tax until the date of the actual sale, subject to the provisions of the law.
Which assets are subject to exit tax?
As a general rule, exit tax applies to capital assets owned by the individual on the date Israeli tax residency is severed. These assets may include, among other things, shares in private and public companies, investment portfolios, options, restricted shares, and rights to equity-based compensation. The application of the tax and the manner in which it is calculated vary according to the type of asset, the date and terms of ownership, and the circumstances of the asset holder.
For this reason, before moving abroad, including for a temporary move, it is important to map all existing assets. An investment portfolio, a holding in a startup company, or options received in connection with a previous employment may affect the tax liability on the date Israeli tax residency is severed or when the asset is sold in the future.
Options, restricted shares, and other rights to equity-based compensation require special review. Even if the right has not yet vested, has not yet been exercised, or cannot be sold on the date of departure, the terms of the grant, the vesting period, the applicable tax track, and the place of employment during the relevant periods should be examined. This review may affect the manner of taxation in Israel and in the new country of residence in the future.
Please note that real estate assets require a separate review. The sale of real estate in Israel is primarily subject to the provisions of the Real Estate Taxation Law and not to the ordinary exit tax rules. In the case of real estate outside Israel, it is necessary to examine the law of the country in which the asset is located, the seller’s country of residence, and the provisions of the relevant tax treaty. In any event, it is advisable to review in advance the allocation of taxing rights and the possibility of obtaining a credit for tax paid in another country.
How does the date of severing tax residency affect exit tax?
The question is not only whether a person moved abroad, but when that person ceased to be considered an Israeli resident for tax purposes. The date on which tax residency is severed determines the relevant point in time for exit tax and affects the portion of the gain attributed to the period of Israeli residency.
The earlier the date of severing Israeli tax residency, the smaller the portion of the gain that may be attributed to the period of Israeli residency. If the severance date is determined to be later, a larger portion of the gain may be taxable in Israel upon sale.
A flight ticket or an employment agreement abroad does not, on its own, determine whether Israeli tax residency has been severed. These documents may support a claim that the center of life has moved to another country, but they are examined together with the full set of life circumstances.
Relocation does not necessarily result in the severance of tax residency. For this purpose, the full set of circumstances must be examined, including place of residence, family unit, economic ties, business activity, and actual conduct in practice.
Exit tax: Payment on the date Israeli tax residency is severed or deferral of payment until the date of sale
Section 100A creates a tax event on the day before Israeli tax residency is severed. In practical terms, the tax may be paid at that time, based on the value of the asset on the date Israeli tax residency is severed. This option may be suitable in certain circumstances, for example where an increase in value is expected after the move abroad. However, where the asset is not publicly traded, such as shares in a private company, this option may require a valuation and raise questions regarding the asset’s value on the severance date.
If the tax is not paid on the date Israeli tax residency is severed, the law provides a deferral mechanism until the asset is actually sold. In this situation, the calculation is not necessarily based on the value of the asset on the date of departure. Instead, the capital gain realized upon sale is examined, and a proportionate part of it is attributed to Israel, based on the holding period up to the date Israeli tax residency was severed out of the total holding period.
The decision whether to pay the tax on the date Israeli tax residency is severed or to defer payment requires an examination of the type of asset, the ability to determine its value, the expected timing of realization, the destination country, withholding tax, and the possibility of double taxation. In the case of options and investments held through Israeli entities, the manner in which tax will be withheld at source on the date of sale should also be examined in advance.
How is exit tax calculated under Section 100A?
When the tax is paid on the date of sale, the calculation is generally based on the ratio between the holding periods of the asset, and not on the fair market value on the date Israeli tax residency was severed. The law attributes to Israel the portion of the gain that accrued during the period of Israeli residency.
The calculation takes into account the period from the date the asset was acquired until the date Israeli tax residency was severed, out of the total holding period until the sale. In practice, the linear calculation allocates the capital gain between the period before Israeli tax residency was severed and the period thereafter.
What happens if you return to Israel before selling the asset?
Exit tax is first examined at the time Israeli tax residency is severed, but the seller’s place of residence and tax status on the date of sale are also important. If the individual returned to Israel before the sale and the income from the sale is taxable in Israel, Section 100A may not limit the tax to the proportionate part of the gain that accrued up to the date Israeli tax residency was severed.
For example, an individual who severed Israeli tax residency, lived abroad, and later returned to Israel before selling the asset may be taxed in Israel on the capital gain realized at the time of sale. Therefore, the mere period during which the individual lived outside Israel does not guarantee that the Israeli tax will be calculated only according to the period of Israeli residency before departure.
As noted, returning to Israel before selling the asset may change the manner of taxation. In certain cases, the sale will be examined under the tax rules applicable to an Israeli resident on the date of sale. The result depends on the type of asset, the date of return, the previous country of residence, and the relevant law and treaty provisions.
Why is it important to prepare for exit tax before moving abroad?
- An early review of the assets, the date of severing tax residency, and expected events allows for greater planning flexibility. Before the move, it is advisable to examine, among other things, the sale of shares, the exercise of options, a financing round in a company, or an expected change in the holding structure.
- It is advisable to retain documents evidencing the date of acquisition of the assets, their cost, and their value, including purchase and grant agreements, option documents, investment reports, and tax confirmations. It is also important to retain documents supporting the date on which Israeli tax residency was severed and the tax paid in Israel or abroad.
- Tax coordination with the destination country – Selling an asset after moving abroad may be subject to tax both in Israel and in the destination country. Therefore, the tax rules in the destination country and the tax treaty between the countries, if one exists, should be reviewed.
A tax treaty may help prevent double taxation by allocating taxing rights or granting a credit for tax paid in the other country. Therefore, before selling an asset, it is advisable to examine the type of asset, the tax liability in each country, and the possibility of obtaining a foreign tax credit.
Before leaving Israel, review exit tax and the severance of tax residency
Exit tax arises during a period in which many decisions are made in connection with moving abroad. An early review of residency, assets, and the timing of the move makes it possible to understand the tax implications and act on the basis of organized information.
Nimrod Yaron & Co. specializes in Israeli and international taxation. Our team is composed of professionals with years of experience at the Israel Tax Authority, alongside experience at leading firms and law offices, bringing together legal and financial perspectives.
We advise individuals on exit tax, severing tax residency, and tax planning before moving abroad. We also work with a professional network of accounting firms and law offices around the world, in order to provide comprehensive support in cross-border matters.
If you are considering relocation or a permanent move abroad, contact us for an early review of the tax implications and planning tailored to your circumstances.
Questions and Answers
Is everyone who leaves Israel subject to exit tax?
Not necessarily. It is necessary to examine whether Israeli tax residency has been severed and whether there are assets to which exit tax may apply.
Is exit tax paid when leaving Israel?
Not always. If the tax is not paid on the date Israeli tax residency is severed, payment may be deferred until the date the asset is actually sold, subject to the provisions of the law.
How can returning to Israel affect exit tax?
Returning to Israel before selling the asset may change the manner of taxation. In certain cases, the sale will be examined under the tax rules applicable to an Israeli resident on the date of sale. The result depends on the type of asset, the date of return, the previous country of residence, and the relevant law and treaty provisions.
Does exit tax also apply if the move abroad is temporary?
Not necessarily. It is necessary to examine whether the individual has in fact severed Israeli tax residency, based on the individual’s life circumstances and the ties that remain with Israel.
Is exit tax relevant to shares and options?
Yes. Exit tax may apply to shares, options, and other equity-based rights, and each asset should therefore be examined according to its circumstances.
Is it possible to estimate the amount of exit tax in advance?
In some cases, an initial estimate can be prepared. This depends on the type of asset, the acquisition date, the date on which Israeli tax residency is severed, and the expected sale date.
Can a tax treaty affect exit tax?
Yes. The tax treaty with the destination country may affect each country’s taxing rights and the possibility of claiming a credit for tax paid in the other country. The wording of the treaty and the circumstances of the transaction should be examined.
Which documents is it important to retain before moving abroad?
It is advisable to retain documents regarding the acquisition of assets, their cost, the grant of options, the value of the assets, place of residence and work, as well as reports and tax confirmations from Israel and from the destination country.
What is the common mistake before relocation?
Postponing the tax review until after the move. It is preferable to map the assets and examine the question of residency before departure.
Can exit tax apply to an investment portfolio?
Exit tax may also be relevant to an investment portfolio and securities. The type of assets, their acquisition date, the date on which Israeli tax residency is severed, and their expected sale date should be examined.
Does the number of days spent in Israel determine on its own whether tax residency has been severed?
No. The number of days is an important factor, but the residency analysis also includes place of residence, family unit, business activity, and economic ties to Israel.
Do options that have not yet vested require review before moving abroad?
Yes. Rights that have not yet vested or are not yet exercisable may also require review, especially where they were granted in connection with work in Israel.
Is the sale of real estate outside Israel affected by severing tax residency?
Possibly. It is necessary to examine the law of the country in which the property is located, the seller’s country of residence, the provisions of the tax treaty, and the possibility of obtaining a credit for foreign tax.
