Israelis Moving Abroad Face Tax Complexities with Local 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 in her residential address, her tax file (mas achilat mas) remains open in Israel because no one formally requested its closure. Income from independent work is generally attributed to the location where the service is performed, not where the payment originates. If an individual has officially severed their 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 physical location of the service provider, not the client signing the order. The act of severing residency is assessed factually, with an active Israeli business file, a business address, and clients reporting payments to an Israeli supplier serving as evidence that might challenge the claim of severed residency.
The Value Added Tax (VAT) system presents a particular challenge. As long as the VAT file remains open, the individual is treated as an active Israeli business and must continue reporting and paying taxes. Once the file is closed and the individual is recognized as a foreign resident, the tax liability shifts. If a foreign resident provides services in Israel, the tax obligation transfers to the buyer, unless the buyer possesses an invoice for the transaction. In practice, the Israeli client may issue a self-invoice, pay the tax, and then deduct it as input tax, potentially leading to disputes over who bears the additional cost, 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, including income tax and National Insurance, involves distinct procedures and requires final reports and settlement of outstanding matters, which cannot be resolved with a single phone call.
For Israeli clients paying foreign residents, withholding tax is the default, and exemptions or reductions are not automatic, requiring approval from the Israel Tax Authority. This can delay payments as finance managers may opt to withhold funds or delay payments until proper authorization is obtained. The existence of a permanent establishment in Israel, such as an office, an employee based in Israel, or a warehouse, can create a taxable Israeli 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 transitions back to Israel, impacting pension and health coverage.
