What is International Taxation?

What is International Taxation?

International taxation is an accounting and tax field that deals with income, assets, and activities of an individual or company outside of Israel. When you have foreign income or you are a foreign resident in Israel, you must comply with complex reporting requirements to the Israeli Tax Authority, and possibly to foreign tax authorities as well. This includes income reporting, foreign asset reporting (FBAR), consideration of double taxation, and understanding international tax treaties.

Self-employed individuals, business owners, companies, and even employees who receive foreign income or hold foreign assets must understand their obligations. Incorrect reporting or misunderstanding of the rules can lead to fees, interest, and penalties from the Tax Authority.

Why is International Taxation Important?

Israel operates a residence-based taxation system. This means that if you are a resident of Israel—whether Israeli or foreign—you are obligated to report all of your worldwide income, including foreign income. Additionally, the Tax Authority requires explicit reporting of foreign assets, foreign bank accounts, investments, and foreign pension funds.

In addition to reporting to Israel, you may face double taxation—meaning the same income is reported and taxed both in the country where it was earned and in Israel. To prevent this, international tax treaties exist between Israel and various countries, but they require deep understanding and professional guidance.

Who Needs Guidance in International Taxation?

• Self-employed individuals and business owners: Who receive foreign income, provide services to foreign companies, or operate a digital business with foreign clients.
• Company owners and startups: That have foreign investments, foreign owners, or international operations.
• New immigrants and foreign residents: Who moved to Israel and are required to report foreign income and assets.
• Employees working abroad: Who work overseas and receive foreign salary, and are required to comply with international reporting.
• Owners of foreign assets: Including real estate, bank accounts, investments, and foreign pension funds.

Reporting Foreign Income — What Must Be Reported?

All income derived from abroad must be reported to the Israeli Tax Authority in your annual tax return. This includes salaries, business profits, dividends, interest, rental income, royalties, and any other form of income. The reporting must be accurate, timely, and in Israeli currency (New Shekel).

One of the most important requirements is foreign asset reporting (FBAR)—reporting on foreign bank accounts, investments, and foreign pension funds. If the total balance of your foreign accounts exceeds a certain threshold at any point during the year, you must file an explicit report. Failure to report or late reporting can result in significant penalties.

Currency Conversion and Income Calculation in Shekels

Foreign income must be converted to New Shekels at the relevant exchange rate. Typically, the average exchange rate used by the Israeli Tax Authority on the date of income receipt is applied. This is important because fluctuations in the exchange rate can affect the amount of income reported and your tax liability.

Expenses and Deductions from Foreign Income

As with income from Israel, you may deduct direct expenses related to foreign income. This includes business expenses, employee salaries, office rent, insurance, local taxes abroad, and the like. However, these expenses must be properly documented and meet the requirements of the Israeli Tax Authority. Incorrect deductions or weak documentation may trigger an audit.

Double Taxation — What It Is and How to Avoid It

Double taxation occurs when the same income is taxed in two countries — in the country where the income was generated and also in Israel. For example, if you are self-employed in the United States and received income from there, you may be required to pay taxes in the US and also in Israel on that same income. This can lead to a heavy tax burden.

To avoid double taxation, there are international tax treaties (tax treaties) between Israel and various countries. These agreements establish rules regarding which country is entitled to tax and what deductions or tax credits are available. For example, the agreement between Israel and the United States defines how income from employment, business, and pension funds is taxed.

Foreign Tax Credit

One way to avoid double taxation is through a foreign tax credit. If you paid taxes abroad on certain income, you may be entitled to a credit for that tax against your tax liability in Israel. However, the credit is generally limited to the Israeli tax rate on that same income. This requires careful calculation and accurate documentation of taxes paid abroad.

International Tax Treaties

Israel has signed international tax treaties with many countries, including the United States, the United Kingdom, Canada, the Netherlands, and more. These agreements establish special rules for the taxation of different types of income and entitlements to tax credits. They can be complex and require a deep understanding of tax laws in both countries. An accountant experienced in international taxation can help you utilize these agreements optimally.

Foreign Bank Account Report (FBAR) — Obligations and Requirements

Foreign Bank Account Report (FBAR) is a mandatory reporting requirement to the Israeli Tax Authority regarding bank accounts, investment accounts, and foreign pension funds. If at any point during the year the total balance in your foreign accounts exceeds a certain threshold, you are required to file a detailed report.

The report must include details about each account — bank name, account number, account type, balances at the beginning and end of the year, and any significant transactions. Failure to report or late reporting can result in substantial penalties and claims from the Tax Authority.

Who is Required to File a Foreign Report?

Any Israeli resident who has a bank account abroad, foreign investments, or a foreign pension fund is required to file a report. This includes self-employed individuals, business owners, employees, and company shareholders. Even if you have control over a foreign account (for example, a family member's account that you manage), you may be required to report it.

Reporting for Associations and Companies

Israeli companies and associations that have assets or accounts abroad are also required to file a foreign report. This is part of annual financial reports and tax reports to the Tax Authority. The report must be accurate and include all foreign assets of the entity.

Typical Scenarios in International Taxation

To better understand the complexity of international taxation, here are some typical scenarios we handle:

Scenario 1: Self-Employed Individual Receiving Foreign Income

Dan is a self-employed consultant in Petah Tikva. He provides services to a U.S. company and received income of $20,000 per year. Dan must convert the income to shekels, report it to the Israeli tax authorities, and then pay Israeli income tax. Additionally, he must report his U.S. bank account where he received the income. If Dan paid tax in the U.S. on this income, he may be entitled to a foreign tax credit against his Israeli tax liability.

Scenario 2: Company Owner with Foreign Shareholders

A limited company in Ramat Gan with Israeli and foreign ownership engages in international business operations. The company receives foreign income, pays taxes abroad, and holds assets outside Israel. The company's annual report must include comprehensive foreign reporting, disclosure of foreign income, and documentation of foreign expenses. Additionally, if the company has foreign shareholders, there may be additional reporting requirements to the tax authorities.

Scenario 3: New Immigrant with Foreign Assets

Michal moved to Israel from the United States as a new immigrant. She owns a rental property in the U.S. and also has an American retirement fund (401k). Michal must report the rental income from the real estate, the retirement fund, and any other assets in the U.S. Additionally, as a new immigrant, she may be entitled to certain tax benefits in the year of arrival, but this requires careful planning.

Scenario 4: Employee Working Abroad Returning to Israel

Yoav worked in London as an employee for three years and received a salary in British pounds. He is now returning to Israel. For the three years abroad, Yoav must report his salary to Israel, convert the income to shekels, and pay tax. Additionally, he must report a bank account he held in London. He may be entitled to a foreign tax credit for taxes he paid in the United Kingdom.

Professional Guidance in International Taxation — Why Choose Ben Or Kook?

International taxation is a complex field that requires deep knowledge of tax laws in Israel and abroad, as well as an understanding of international tax treaties. Errors in reporting can be costly and may lead to prolonged tax authority audits.

Ben Or Kook offers professional and personalized guidance for self-employed individuals, business owners, companies, and individuals with income or assets abroad. Our team has extensive experience handling international cases and can help you:

• Understand your reporting obligations to the Israeli tax authority
• Report foreign income correctly and on time
• File an accurate and timely foreign report (FBAR)
• Address double taxation and utilize foreign tax credits
• Understand and leverage international tax treaties
• Plan your taxes strategically to reduce your tax burden

We work with self-employed professionals in various fields, business owners, startups, companies, and nonprofit organizations. Our service is personalized, digital, and accessible — we tailor the guidance to your specific needs.

First Consultation Meeting at No Cost

If you reside in Petach Tikva, Ramat Gan, or the central region, and have questions about international taxation, foreign income reporting, foreign reporting, or double taxation — we invite you to a free initial consultation meeting. In this meeting, we will understand your case, answer your questions, and provide you with an initial assessment of your needs.