Israelis Abroad Face Tax Complexities with Israeli Clients
An Israeli software developer who relocated to Lisbon but continues to work with three clients in Tel Aviv is navigating a complex tax situation involving multiple Israeli authorities. Despite the change of address, her clients remain in Israel, and her tax file (Mas Akhim, or VAT) remains open because no one has formally requested its closure. Income from freelance work is generally attributed to the location where the service is performed, not where the payment originates. If an individual officially severs their Israeli residency and all work is conducted outside Israel, the income is considered non-Israeli, even if paid by an Israeli company to an Israeli bank account. The key factor is the location of the person performing the work, not the client signing the contract. Severing residency is assessed factually, and factors like an active Israeli business file, a business address, and clients reporting payments to an Israeli supplier can challenge the claim of severed residency.
While the individual is abroad, the Israeli VAT authority views the open file as an active Israeli business requiring regular reporting and payment. Once the file is closed and the provider is considered a foreign resident, the tax liability shifts. If a foreign resident provides services in Israel, the buyer becomes responsible for the tax unless they possess an invoice for the transaction. In practice, the Israeli client may issue a self-invoice, pay the tax, and deduct it as input tax, potentially leading to disputes over who absorbs any difference, especially for small businesses.
Furthermore, a foreign resident with business activity or a permanent establishment in Israel is legally required to appoint a representative residing in Israel within 30 days of commencing operations. This representative assumes the status of the taxpayer, carrying significant personal liability. Closing tax files with Israeli authorities (VAT, Income Tax, National Insurance) is a multi-step process, not a simple phone call. For those intending to continue genuine business activity in Israel, intentionally keeping the file open might be preferable, but this decision requires careful documentation.
The client's perspective also changes. Payments to foreign residents are subject to withholding tax by default, and exemptions or reductions are not automatic, requiring approval from the tax authorities. This can delay payments as Israeli clients may withhold funds or deduct taxes without prior authorization. The existence of a permanent establishment in Israel, such as an office, an employee based in Israel, or a warehouse, can create a taxable business presence even if the owner resides abroad. Tax treaties between countries help allocate taxing rights and prevent double taxation but do not eliminate reporting obligations. The National Insurance Institute has its own procedures for handling returns to Israel, with implications for future benefits.
