What is Relocation from a Tax Perspective?

Tax Relocation — Definition and Importance

Tax relocation is a process of changing one's place of residence (country or region) to create a new tax status. When a person moves to Israel from abroad, or vice versa, their tax residency status changes with respect to income tax — and this affects the types of income a country can levy taxes on, possible tax benefits, and international reporting obligations.

In the Israeli context, relocation typically refers to a new immigrant arriving in Israel, or an Israeli resident leaving the country. From a tax perspective, this is a critical event that requires careful planning — as it determines which income will be subject to tax, what special tax rights apply, and what reports must be filed with the tax authority in Israel and abroad.

Tax Residency — The Basis of Relocation

Tax residency is a legal definition by the country in which you are considered a "resident" for income tax purposes. In Israel, a person is considered a tax resident if they are domiciled in Israel for part of the tax year (or if their center of economic interests is in Israel). As long as you are a tax resident in Israel, you are liable to tax on all your worldwide income — whether from Israel or abroad.

When you change your place of residence, you essentially change your classification for income tax purposes. This does not happen automatically — the Israeli tax authority must receive appropriate notification, and there is a legal process of proving the change in residency.

Relocation to Israel — New Immigrant and Tax Status

A new immigrant arriving in Israel is considered a tax resident of Israel from the date of arrival. However, the Israeli Tax Authority grants special tax rights to new immigrants under the Law for the Encouragement of Capital Investments in Israel and the Law for the Protection of New Immigrants.

New Immigrant Tax Benefits

Generally, a new immigrant who arrived in Israel within the past year is entitled to tax benefits such as:

• Exemption from foreign source income: Under certain circumstances, income earned by the immigrant abroad may be exempt from tax in Israel (subject to certain legal conditions).
• National insurance benefits: New immigrants may be entitled to benefits in the payment of national insurance contributions for a certain period.
• Reduced reporting requirements: During the initial period, reporting obligations may be lighter.

However, these rights are not automatic — an application must be submitted to the Israeli Tax Authority, and experienced guidance from a certified public accountant specializing in new immigrant taxation is often required. Ben Or Kook frequently handles companies and self-employed individuals who are new immigrants and prepares tax benefit applications tailored to each specific case.

International Reporting for New Immigrants

Even if a new immigrant is entitled to benefits, they must file tax returns with the Israeli Tax Authority, and in some cases also with foreign tax authorities. This includes reporting foreign source income, foreign assets (in an FBAR report if a foreign bank account exceeds a certain threshold), and international tax arrangements.

Relocation from Israel to Abroad — Termination of Tax Residency

When an Israeli resident leaves the country with the intention of settling abroad, a process of terminating tax residency in Israel begins. This termination is not automatic — you must notify the Israeli Tax Authority, present evidence of the move (such as obtaining a work permit abroad, a rental contract abroad, etc.), and there are closing tax reports that must be filed.

Exit Tax and Closing Obligations

Generally, when a person leaves Israel, they must file a closing tax return for the period in which they were a tax resident in Israel during that year. If they had assets in Israel (an apartment, study fund, securities, etc.), there may be tax liabilities on capital gains or dividends upon departure.

Additionally, there are international tax reports that may need to be filed with the Israeli Tax Authority upon termination of residency, to demonstrate that there is no further tax liability in Israel on foreign source income (in accordance with international arrangements).

Foreign Source Income — Reporting Obligation

Even after leaving Israel, a former Israeli resident may be required to report to the Israeli Tax Authority on income sourced from Israel (such as rental income, dividends from an Israeli company, etc.), and in certain cases also on foreign source income — in accordance with international arrangements (tax treaties) between Israel and the new country of residence.

Comparison of Relocation Scenarios — Practical Examples

To better understand the impact of relocation on your tax situation, let us review several typical scenarios:

Each scenario requires a unique examination of the individual's financial, family, and tax situation. This is why the guidance of an experienced certified accountant in the field of international taxation is of critical importance.

Tax Relocation Process — Key Steps

Step 1: Advance Planning

Before starting the relocation process, it is advisable to consult with a certified public accountant regarding tax implications. This includes reviewing existing income, foreign assets, outstanding tax liabilities, and potential eligibility for tax benefits.

Step 2: Notification to the Tax Authority

Generally, the Israeli Tax Authority must be notified of a change in tax residency status. This may be done through a direct report or as part of filing an annual tax return or advance payment report. The notification should be clearly marked so that the Tax Authority can update its records accordingly.

Step 3: Filing Closing Tax Reports

If you are leaving Israel, you must file a closing tax return for the period during which you were a tax resident of Israel in that year. If you are a new immigrant, you must file a tax return for the period during which you are a tax resident of Israel.

Step 4: International Reporting

Depending on your financial circumstances, you may be required to file international reports such as FBAR (if you hold a foreign bank account with a high balance), reports on foreign assets, and reports on foreign source income.

Step 5: Ongoing Compliance

Following the relocation, you should maintain ongoing tax compliance to ensure you meet your reporting obligations in both countries (if applicable) and to obtain any tax benefits you may be entitled to.

International Taxation and Relocation — Important Principles

Double Taxation and International Harmony

Generally, Israel has signed international agreements (tax treaties) with many countries. These agreements are designed to avoid double taxation — meaning you should not be taxed twice on the same income in two countries. When you relocate to another country, it is important to check whether a tax treaty exists between Israel and that country, and how it affects your tax obligations.

CRS Reporting (Common Reporting Standard)

In recent years, many countries (including Israel) have signed an international agreement called FATCA/CRS. This agreement requires banks and financial institutions to report on accounts of foreign residents to the tax authorities of their country. This means that if you hold a bank account in Israel and you are a tax resident abroad, an Israeli bank may report your account to the foreign tax authority.

FBAR — Reporting Foreign Bank Accounts

If you are a new immigrant to Israel and you have a foreign bank account with a high balance, you must file an FBAR report with the Israeli tax authority. This report constitutes a disclosure of foreign assets and must be filed on a special form by the prescribed deadline.

International Tax Arrangements

Generally, an international tax agreement determines which country is entitled to impose tax on a certain type of income. For example, employment income is typically taxable in the country where the work was performed, while income from assets may be taxable in the country of residence. When you change your place of residence, it is important to check how these arrangements affect your taxes.