Relocation is a process of moving from a country of residence to another country for a temporary or permanent stay. Relocating is usually done for the purpose of career development, job change, academic studies, diplomatic missions, and more.
The relocation process has become more and more common, following the development of technology, globalization, and digital economy. The high-tech industry has been the leader in the field of relocations for years. The bigger and more well-known the high-tech company is, the more international branches and employees they are likely to have.
In most cases relocation is done on behalf of companies that want to develop and break political borders or cooperate with international companies and therefore “scatter” their employees around the world.
However, there are also initiated and voluntary relocation cases of independent workers, especially during the pandemic and post-pandemic period, that “forced” society into the online world. As a result, many realized that any work-related matters can be done efficiently online. This leap into modern technology and understanding that work can be done from anywhere, motivated people to fulfill themselves wherever they choose to.
Preparation for Relocation
The relocation process involves quite a few changes and adaptations, especially when it comes to a family relocating. The essential basis and perhaps the most important one is to make sure that there is a work and/or residence visa in the country to which you are moving. There are a lot of bureaucratic aspects that can make the relocation difficult, exhausting, and in some cases even impossible.
This page will serve as a guide for those of you facing the Relocation process or for those for whom it is still a dream.
Relocation and taxation aspects
A resident of Israel will be liable for tax in Israel as well as for income he generated abroad. As a result, an individual resident of Israel who relocates is liable to pay tax and national insurance in both countries. This is where the issues of residency, “severance of residency” and treaties to prevent double taxation come into play.
How is residency determined for tax purposes?
As mentioned above, a resident of Israel will be liable for tax in Israel, but how is his residency determined?
The main test to determine residency, according to the Israeli Income Tax Ordinance, is the “center of life” test (as defined under Section 1 of the Israeli Income Tax Ordinance [New Version], 5721-1961).
As part of the “center of life” tast, various considerations will be taken into account, including the following considerations:
- The location of permanent home (even if the taxpayer’s does not reside there).
- The location of an actual home of the taxpayer’s and members of his family (actual place of residence).
- The location of fixed or permanent business or work of the taxpayers.
- The location of active material economic interests of the taxpayers.
- The location of the taxpayer’s activity in organizations, associations, or institutions.
In addition to the above qualitative criteria, the Israeli Income Tax Ordinance sets down technical assumptions, the existence of which provides evidence of the individual’s “center of life” in Israel:
(a) if, the individual was present in Israel for 183 days or more in a certain year;
(b) if, the individual was present in Israel for 30 days or more in a certain tax year, and total presence in Israel of 425 days or more during that tax year and the two previous ones.
Should an individual be deemed to be an Israeli resident while at the same time resident of another country?
When an individual qualifies as a tax resident under the laws of two countries, the tie-breaker rules outlined in the applicable tax treaty will ascertain the country of tax residency. Generally, the treaties focus on factors relating to where the person’s permanent home is maintained, in which country the person’s personal and economic relations are closest (‘center of vital interests’ test), and in which country the person is a national.
When the tax rate of the country to which an individual desire to move, is lower than the tax rate in Israel, it may be preferable to sever residency in Israel and pay tax in the country to which he moved. However, he will be able to do this, only if he meets the criteria for determining the center of his life abroad.
To the extent that an individual is interested in severing residency, he will also have to settle the exit tax issue at the time of his departure. According to section 100a of the Income Tax Ordinance, property of Israeli resident, who has ceased to be a resident of Israel, will be considered sold on the day before the day on which he ceased to be a resident of Israel.
An individual can pay the tax on the date of severance of residency as if the property was sold according to its market value, or on the date of realization (sale of the property) and then on the date of realization he will pay the tax applicable due to the sale of the property at the time he ceased to be a resident of Israel, in an amount equal to the amount of tax applicable to the portion of the taxable profit.
However, the linkage differences and interest, as defined in section 159a, will only be added starting at the time of realization until the actual payment of the tax. Whatever alternative you choose, the date of the tax event is the day before the date of disconnection of residency.
For more on determining individual residency and disconnecting residency click here.
Relocation to a country that has a treaty to prevent double taxation with Israel, is a different case that includes a significant advantage for an individual and his family. The Administration for the Prevention of Double Taxation is a bilateral agreement, within the framework of which the two countries that are parties to the agreement determine the taxation rules that will apply to income and assets that have an affinity to both countries. In such a case, even if the individual is considered a resident of Israel according to the tests, he may not be considered a resident of Israel for tax purposes, in accordance with the provisions of the treaty.
Also, the Tax Authority published Taxation Decision 2519/17 according to which, if the conditions listed in the decision are met, an employee sent by a company to work abroad in affiliated companies in treaty countries, will be considered a resident of that treaty country for the purpose of withholding tax on his income from a salary abroad.
Relocation in terms of social security
A resident of Israel who has relocated to another country is obligated to pay national insurance fees in Israel to maintain the continuity of his or her rights. In addition, before leaving the country, it will be required to fill out a multi-year accounting form and send it to the National Insurance branch nearest to the place of residence or contact the branch and report the trip.
In addition, an Israeli resident who is employed abroad by an Israeli employer and whose employment contract was signed in Israel, will be considered an employee and the obligation to pay and deduct insurance premiums from his salary rests with his employer in Israel.
However, a resident of Israel who moved to a country with which Israel has signed a social insurance treaty and pays insurance premiums in that country, will be exempt from social security premiums in Israel. However, the exemption will not apply to health insurance premiums paid at the minimum rate – NIS 104 (as of 2022).
In a situation where a resident of Israel is sent by an Israeli employer to work in a country with which there is a treaty, the employer will continue to pay social security and health insurance premiums for him in Israel and the employee will be exempt from paying insurance premiums in the treaty country.
Return to Israel at the end of a temporary relocation
As mentioned, not all relocation processes are permanent and, in many cases, the individual and his family will return to Israel several years later, even if their residency was terminated for tax purposes. Since 2008, the State of Israel has promoted a tax policy aimed at encouraging the immigration of returning residents to Israel and offers a series of tax benefits that vary according to the number of years the returning resident has been abroad.
There is no doubt that the relocation process entails many aspects that require care and regulation that are sometimes complicated and even impossible to do independently. Therefore, it is advisable to use the services of an international taxation office which can guide you through the entire relocation process, from the initial decision-making stage to the final transition and settlement in the new country.
