Frequently Asked Questions on International Taxation — Complete Guide

Who is this International Taxation Guide for?

If you are a self-employed individual or business owner receiving foreign income — whether from employment with a foreign company, digital project income, or sales through international platforms — this guide is for you. Even if you own a company in Israel that works with subsidiaries abroad, or if you are a new immigrant who transferred assets from outside Israel, this subject is highly relevant.

What is important to remember: in Israel, every resident — whether self-employed, an employee, or a business owner — must report to the tax authority all income from any source worldwide. This is not something that can be ignored. Improper reporting can result in penalties, interest, and warnings from the authority.

In this guide you will find answers to frequently asked questions: What exactly must be reported? How is income in dollars or euros handled? What is FBAR and who is obligated to file it? How do you work with tax treaties? We will also share common mistakes we have seen in practice, and when it is advisable to consult an accountant.

What is International Taxation and Who is Required to Pay It?

International taxation is a field that deals with reporting and paying taxes on income and savings derived from abroad. In Israel, every resident (holder of permanent residency status) is required to report to the tax authority all income from any source, whether earned in Israel or abroad. This includes mortgage income from foreign property, dividends from a foreign company, or salary received from employment abroad.

This reporting is not merely a legal obligation—it is also a way to avoid future problems with the tax authority. When you transfer money between foreign bank accounts or receive payments from a foreign company, all these transactions can be monitored by tax authorities abroad and in Israel.

In short: if you hold permanent residency status in Israel and have foreign income, this concerns you. If you have not yet reported it, it is best to settle this as soon as possible.

How International Income Reporting Works — Step by Step

The process of reporting foreign income involves several stages. Let's go through them one by one.

1. Document Collection. You need to collect every document related to foreign income: mortgage certificates, bank statements, quotations from foreign companies, payment receipts. If you received a salary slip from abroad, that is also important. Every document must be in Hebrew or accompanied by an authorized translation.
2. Currency Conversion. If the income is in dollars, euros, or another currency, you must convert it to shekels according to the exchange rate on the date of receipt. This is important because the Israeli Tax Authority requires reporting in shekels only.
3. Tax Calculation. According to law, foreign income is subject to tax withholding on foreign investments, or at regular tax rates depending on the type of income. In some cases, there are bilateral tax reliefs (tax treaty) between Israel and the country from which the foreign income originates.
4. Reporting in an annual report or advance payment report. If you are self-employed or business owner, foreign income is reported in your annual report (Form 1). If you are a salaried employee, it may appear on your salary slip or in an advance payment report.
5. Tax Payment and Obligations. Based on the calculation, you may be required to pay advance tax (prepayments) to the Tax Authority. This is typically done through your bank or the Tax Authority's application.
6. Record Retention. It is very important to retain all original documents for at least six years. The Tax Authority may request them at any time.

This process may seem complicated at first, but with proper organization and professional consultation, it becomes routine.

What You Need to Know About Tax and International Income Reporting

The subject of international taxation involves several basic principles that are important to understand. First, Israel taxes worldwide income — this means that anyone who has permanent residence in Israel must report income from any source in the world. It doesn't matter if the income comes from the USA, the UK, Germany, or any other country.

Second, in some cases there are tax treaties between Israel and other countries. These agreements are designed to prevent "double taxation" — meaning you don't pay tax in two countries on the same income. For example, if you are self-employed and worked in the USA and paid taxes there, you may be able to receive a tax credit in Israel for the taxes you already paid. However, this depends on the details and the type of income.

Third, there are specific reporting obligations that are not always clear. If you have a bank account abroad with a high balance (above a certain amount), you must report this to the tax authorities. This is called reporting of foreign assets. If you have a property (house, land) abroad, this also needs to be reported.

Fourth, FBAR (Foreign Bank Account Report) is a specific report that some cases require. It is not exactly a tax, but a report of balances in foreign accounts. Generally, if the total balance of your foreign accounts exceeded a certain amount in any given year, you need to report it.

One point that is not always clear: when talking about "foreign income," it is not just money that goes into an account. It also includes income in kind (for example, a gift received abroad), investment losses, or interest on a foreign bank account. All of this must be reported properly.

Common Mistakes in International Tax Reporting and How to Avoid Them

Over the years we have worked with our clients, we have seen several recurring mistakes. Here are the most common errors:

• Failure to report foreign income. This is the biggest mistake. Clients assume that if income is received in a foreign account, it does not need to be reported in Israel. This is incorrect. All income must be reported, whether earned in Israel or abroad.
• Incorrect foreign currency conversion. When reporting income in dollars or euros, you must use the official Bank of Israel exchange rate on the date the income was received. Some people use a "reasonable" rate of their own, which causes errors.
• Forgetting related reporting obligations. People report income but forget to report assets abroad (house, bank account, investments). The tax authority views this as lack of transparency.
• Misunderstanding of tax treaty. Some clients think that if they have a tax treaty, they don't need to pay tax in Israel. This is not quite correct. A tax treaty gives preference to foreign tax, but you must submit a special request to the tax authority to implement it.
• Failure to maintain documentation. People do not keep receipts, bank statements, or other documents proving income. When the tax authority asks, they have nothing to present.
• Late reporting. When you get to reporting and discover you missed a year or two, it becomes much more complicated. You need to file amendments, and there may be penalties and interest.
• Misunderstanding of FBAR and banking reporting obligations. Some people do not know that they must report foreign bank accounts separately from income reporting. This is a separate and important report.

How to avoid these mistakes? The best way is to plan ahead. If you know you have foreign income, contact an accountant who specializes in this area. It saves time, money, and headaches later.

New Immigrants and Relocation — Special Cases

New immigrants who have transferred assets from outside Israel or who have income from outside Israel — this is a special case. When you receive an immigration certificate, you have special rights under the law, but also specific reporting obligations.

Generally, in the year of immigration and for a few years afterward, you can use "new immigrant benefits." But this does not mean you are exempt from reporting. You still must report foreign income, but under special conditions there may be relief in tax calculation.

People who relocated (moved abroad for work) — this is also a case that requires careful planning. If you still have permanent resident status in Israel, you must still report worldwide income. But if you give up permanent resident status, this changes your reporting obligations.

When Should You Consult an Accountant Specializing in This Area?

If you are a self-employed person or business owner with foreign income, it is time to consult an accountant. Generally, if foreign income constitutes a significant portion of your income, or if you have assets abroad, it is advisable to seek professional advice.

Even if you are an employee but have received foreign income that was not reported on your payslip, this is a matter that needs to be addressed. An accountant can help you understand whether you are entitled to a tax refund or if you need to pay back taxes.

If you are a business owner working with subsidiaries abroad, or if you have a digital business that receives payments from overseas (for example, through Stripe or PayPal), this is definitely something you should plan with an accountant.

In short: if you have any doubt or are unsure about your reporting obligations, it is better to ask. This prevents problems down the road.

Real-World Examples — True Stories

Self-Employed Professional Who Worked Abroad: One of our self-employed clients worked in the United States as a consultant for two years. He received income in dollars and transferred part of it to Israel while keeping part in a U.S. bank account. He did not report it in Israel, thinking that because the money was abroad, it was not the concern of the tax authority. When he returned to Israel and began filing reports, he discovered that he was required to file amended returns for previous years. This cost him penalties and interest.

Business Owner with Foreign Income: One of our business owner clients owned a property abroad (an apartment in London) that he rented out. He received rent in British pounds. He did not report it because he thought it was a foreign asset and not income. The tax authority questioned him, and he was required to report foreign income and pay taxes on it.

New Immigrant with Foreign Assets: One of our new immigrant clients immigrated to Israel with a foreign bank account containing substantial savings. He did not know he was required to report it. When he started working in Israel and began filing tax returns, the authority questioned him about the source of the funds. This led to unnecessary investigation and prolonged communication with the tax authority.

These examples show that correct reporting from the beginning saves many problems later.