Planning for Work After Aliyah

21/02/2017

Proceed with caution! Are you sure that your income will fall under Israel’s 10-year tax exemption?

One of the most crucial parts of an Aliyah plan is for employment after arriving in Israel. Arriving with a signed job contract in hand, however, is extremely unusual. One possibility to ease the transition to working in Israel is keeping your current job. While this continuity can provide a boost to both your bank account and your morale, there are important tax questions that must be addressed – and the ideal time to do this is before you move.

Israeli Income Tax and the 10-year exemption

Many prospective and current olim have heard of Israel’s 10-year tax exemption on foreign income. This law on the books dates back to 2007 and also applies to Israelis who have been non-residents of Israel for a minimum of 10 straight years. However, a misconception is that all foreign-sourced income is exempt from taxation. In fact, the 10-year exemption applies only to passive income (such as: interest, dividends, capital gains, rent income, or royalty income) and income earned while physically outside of Israel. Income earned while working for your “foreign” company from your home office in Israel is subject to Israeli income tax.

Please note that if you reside in Israel prior to officially making Aliyah, there may be an impact on the duration of this exemption. Contact a qualified tax professional for guidance.

Employer Exposure

Foreign employers who choose to employ Israeli residents, either as individuals or through an owned entity that operates in Israel, should be aware that they may be subject to Israeli taxation. Although the tax responsibility lies with the employer, not the employee, it should be discussed in advance.

United States Citizens and Contractual Possibilities

U.S. citizens are required to report their income to the IRS regardless of where they reside or earn it. Living and working outside of the U.S. may change who has first rights to this taxable income, but it must be accounted for. Should you and your employer come to an agreement about your continued work, there are various ways your contract can be structured, including:

As a full-time employee (issued a W-2)
As a contractor (issued a 1099)
As an employee of an Israeli firm that contracts to the U.S. firm. Two possibilities stemming from this choice are that the employee owns the Israeli firm or that the employer owns the Israeli firm. These can have a wide-ranging impact for tax reporting and payments on both sides of the contract.

The same possibilities apply if you were to start working for a new foreign employer upon your Aliyah, rather than staying with the same one.

Self-employed individuals (who contract back to their U.S. firm and receive a 1099) must file taxes in the U.S. and in Israel and are subject to self-employment tax (social security/bituach leumi) in both countries.

Best Practices

Unfortunately, there isn’t a one-size-fits-all approach to manage post-Aliyah continued employment. We strongly suggest planning beforehand with the guidance of a qualified professional. We can offer tax expertise for multiple countries! Contact us today.