How is an Ole Hadash's income from abroad taxed?
Most Olim think (perhaps wrongly) that Ole Hadash income from abroad is tax-free in Israel!
Error: Not everything is exempt.
Chances are you'll have to declare much, if not all, of the income you generate from Israel.
New immigrants and returning citizens are entitled to full exemption of their foreign income. This exemption is granted for a period of ten years from the day of their Aliyah.
But in most cases, once they've settled in Israel, they continue to do business abroad, working from Israel.
The nuance is there.
It is important to distinguish between activities carried out abroad (requiring travel abroad) or passive income, and income generated and produced from Israel for clients based abroad.
This part of the activity carried out in Israel must be declared in full and will therefore be taxed by the Israeli tax authorities..
In the event of an audit, the Israeli tax authorities may demand tax on this income, if the work is carried out from Israel.
The conclusions of the Israeli tax authorities are summarized at the end of this article, and are very restrictive in some cases.
Activity in Israel - case study
A tax ruling was issued on November 20, 2018, directive no. 2316/18, concerning the "mixed income" mechanism for a new immigrant to Israel on his income generated in Israel and abroad.
This is the case of a person who arrived in Israel on July 15, 2013 with his wife and three children. From the day of his arrival, the family lived in a rented apartment in Israel. On July 31, 2013, he received new immigrant status from the Ministry of Immigrant Absorption.
On 17.9.2013, the new immigrant requested to elect an "additional year of integration" within the meaning of section 14 (b) of the Israeli CGI, which began on the date of arrival and ended on July 14, 2014. Prior to his immigration to Israel, in 2006 he was working as an employee in a company resident abroad, which has branches all over the world - including a branch in Israel.
As of August 1, 2013, this Olé Hadash began to hold a senior management position in the foreign company on the European continent. According to the employment contract, the taxpayer's usual place of business is its foreign headquarters. From time to time, the taxpayer should be prepared to work in the offices of the foreign company's Israeli subsidiary, while his salary for work performed in the foreign company's branches in Israel and abroad will be paid in full by the Israeli branch.
The taxpayer sought to determine the date on which he became "resident in Israel for the first time", with regard to the period and exemption provisions of the Israeli CGI. This determination is essential in order to know when the income paid by the branch for the activity carried out abroad is supposed to be declared and taxed in Israel.
For the purposes of this tax ruling, it was determined as follows:
1. Residency provisions applicable to the taxpayer:
Since the taxpayer has requested an adjustment year within the deadline, as permitted by paragraph 14 b) of the Ordinance, he is deemed to be a foreign resident within the meaning of the term "foreign resident" in Article 1 of the Ordinance during the adjustment year.
As of July 15, 2014, the taxpayer is considered a resident of Israel (hereinafter: "the date of commencement of residence").
2. Provisions applicable to the taxpayer with respect to labor income paid to him by the Israeli branch of the foreign company:
The taxpayer's income paid to him by the Israeli branch of the foreign company must be considered as income which, during the year of adjustment, is deemed to be income received by a foreign resident.
As such, this income is not taxed in Israel during the year of adjustment.
From the date of commencement of Israeli tax residency (July 2015), the income received is considered income received by an Israeli resident who became an Israeli tax resident for the first time (תושב מס לראשונה).
This income will be divided into two parts:
(A) The first part of the income - a labor income paid to a taxpayer by the foreign company's Israeli subsidiary multiplied by the ratio between the total number of working days in Israel during a given period and the total number of working days during a given period - is considered as income generated in Israel by a foreign resident or a resident And will be taxable in Israel.
"Total number of working days in a certain period": the total number of days in a given period, excluding Saturdays, Sundays, public holidays, vacations and private travel during that period (the taxpayer may also choose to deduct Fridays instead of Sundays during that period).
With regard to the number of working days in a given period, "day" - including part of the day.
"Total number of days worked in Israel during a given period": the total number of days during which the taxpayer stayed in Israel during a certain period, excluding Saturdays, Sundays and Fridays, public holidays, vacations and private trips during which the taxpayer stayed in Israel.
"Total number of days worked abroad in a given period": the total number of days worked in a given period minus the total number of days worked in Israel in a given period.
(B) The second part of the income - equal to the balance of the taxpayer's working income paid by the Israeli branch of the foreign company for a separate period, is considered income earned abroad by a foreign resident and is exempt from tax in Israel.
3. In the case of the foreign company, the payroll expenses paid by the company to the taxpayer will be multiplied by the ratio between the total number of days worked abroad during a given period and the total number of days worked during a given period.
This expense will not be a deductible expense for the Israeli branch, and can therefore no longer appear on the books of the Israeli branch. This is because this income does not constitute an income-generating tax expense for the Israeli structure.
Tax exemption in Israel: Conditioned on the number of days
Tax exemption in Israel for the second part of the income depends on the period during which the taxpayer worked outside Israel each year. This period must not be less than 60 working days per year.
If the employee spends less than 60 days a year, Israeli tax authorities will consider that all income has been produced and generated in Israel. The income will therefore be fully taxed in Israel.
The taxpayer is required to submit an annual tax return to the mas ahnassa (income tax) and declare all income, including that from the portion of income allocated abroad.ALSO READ: Is foreign travel recognized?
Conclusion: Making aliyah does not mean tax exemption
This new tax position reflects Israeli tax authorities introduce a "fair and real" tax on income produced and generated in Israel.
Several people have recently been reassessed and/or audited by the Israeli tax authorities.
We know that Israel's annual budget for the coming years will be in serious deficit.
It's a safe bet that taxes will increase the frequency and number of inspections.
In a nutshell:
If you receive income from foreign companies or clients, but some of your work is carried out in Israel, you need to set up a tax structure in Israel that will enable you to declare this income.
Our firm can handle your tax affairs and help you manage your business.