Relocation abroad

income tax and Social Security aspects

Rami Arie, Adv. CPA

Going abroad for one reason or another, please note that full or partial relocation abroad requires tax advice and planning in advance to prevent future issues both in terms of income tax and in terms of social security regarding the taxation of future income, exit tax, Social Security, health insurance rights and more.

Proper advice and preparation in advance will also prevent the initiation of criminal proceedings and the filing of indictments for failure to report income from abroad. The exposure of which has intensified greatly recently in light of the Tax Authority's policy of locating foreign bank accounts of Israeli citizens and acquiring information about them from the tax authorities abroad.

In any case, this article is relevant not only to those who plan to relocate in the near future, but to Israeli citizens, already relocated for a long time, as well.

The Income Tax Ordinance establishes tax liability in Israel by the personal method. This means that an individual who meets the definition of "Resident of Israel" will be required to pay tax to the Israel Tax Authority on his active and passive income, whether produced in Israel or abroad.

The definition of "Resident of Israel " in Section 1 of the Ordinance states that an individual meets this definition insofar as his center of life is in Israel. For this reason, it is necessary to examine the totality of his family, economic and social ties. Among other things, it is necessary to examine the place of his permanent residence, his family members' residence, his place of occupation, the place of his economic interests, the place of his activity in different organizations, in unions or in various institutionsand more.

Part of the center of life is the "presumption of days" test.An individual is considered aresident of Israel, if he stayed in Israel for 183 days or more of the tax year, or if he stayed in Israel for at least 30 days and the total period of his stay in Israel of the current tax year and in the preceding two years was at least 425 days. It should be noted that these presumption can be contradicted by both the individual and the tax assessor, so the lack of the presumption does not automatically negate the classification as a foreign resident. In addition, regarding the presumption of days, the Israeli Tax Authority granted leniencies regarding staying in Israel during the covid-19 period.

An individual who fail to prove that his center of life has moved abroad, in  full relocation, will be required to report to the Israeli Tax Authority all his income, including from abroad, and will be taxed in Israel in accordance with the tax rates customary in Israel, minus the tax he paid abroad. Therefore. It is advisable to seek tax advice and examine in advance the application of the Life Center test before moving abroad and certainly while staying abroad.

In addition, section 100A of the Ordinance established provisions for the "Exit Tax" from Israel. This section determines the law regarding the assets of a taxpayer who has relocated abroad and ceased to be a "Residentof Israel". As a rule, the exit tax will be calculated in such a way that the assets will be considered as if they were sold on the day of immigration from Israel, but the payment of the tax can be deferred until the date of actual sale of the assets.

It should be noted that the State of Israel is a signatory to treaties for the prevention of double taxation with many countries, and some of the treaties apply different methods to determine residency, differ in provisions on withholding tax and provisions regarding crediting the foreign tax in calculating the tax liability in Israel. The provisions of the treaties for the prevention of double taxation supersede the provisions of local Israeli tax law.

As far as Social Security is concerned : "A resident of Israel" is obligated to pay Social Security and health tax at a rate of his income. On the other hand, a "Non-resident" is exempt from paying insurance premiums, but he is not entitled to rights under the Social Security Law or to the health services . The residency test will be determined, first and foremost, according to the permanent residence and concurrently by the other center of life test that are used by the Israeli tax authority.

Many are those who meet the criteria of non-resident status, and yet continue to pay insurance premiums in Israel. In practice, when they'll try to exercise their rights under the Social Security Law (disability pension, old-age pension, etc) or their right to the health services, they will find that the Social Security Institute will claim that they are non-residents and therefore are not entitled to these rights, even if they paid insurance premiums regularly during all the years of their stay abroad.

In order to sever residency regarding Social Security, a proactive application to the Social Security Institute is required, which will include a declaration of severance of residency from Israel.In addition, an individual who has been abroad for more than five years is expected to receive notice from the Social Security Institute that he is no longer entitled to the rights in the Social Security and Health Law , But he can appeal this determination on the date set by law.

Please note that even with regard to the preservation of Social Security rights for an individual who emigrated from Israel, there are social insurance treaties between Israel and other countries, according to which there will be a continuum of rights even when emigrating abroad in accordance with what is stipulated in each treaty.

It is hereby clarified that the aforesaid does not contain all the distinctions for identifying an Israeli resident or a foreign resident, the identification of tax liabilities, the liabilities and rights under the Social Security Law and the Health Insurance Law, regarding those who go abroad, in full or partial relocation.

To avoid future tax issues, and the initiation of criminal proceedings for non-reporting and omission of income. We recommend that an individual interested in relocating, fully or partially abroad, seek tax advice in advance regarding the severance of his residency from Israel, which will include the income tax and Social Security aspects regarding the nature of his departure abroad.