Relocation & Terminating Israeli Tax Residency: The Full Guide

Category: International Taxation | Reading time: approx. 5 minutes

Thousands of Israelis move abroad every year — hi-tech relocations, medical fellowships, studies or emigration. Many discover a surprising fact too late: an Israeli resident is taxed in Israel on worldwide income, and "resident" status does not end the day the plane takes off. Someone who fails to lawfully terminate tax residency may find themselves, years after moving, facing an Israeli tax demand on the salary earned in Berlin or New York — plus interest and penalties.

Who Is an Israeli Resident? The Center-of-Life Test

Tax residency is determined by a substantive test: where your "center of life" is. The courts and the Tax Authority examine the totality of connections: where the permanent home is, where the spouse and children live, the place of work and economic interests, bank accounts, memberships — even your HMO. Alongside the substantive test are quantitative day presumptions:

• Presence in Israel of 183 days or more in a tax year — a presumption of residency;
• Presence of 30 days or more in the tax year, where total presence in that year and the two preceding years reaches 425 days — also a presumption of residency.

The presumptions are rebuttable — but residency termination is not a single event; it is a process built from evidence: a long-term lease abroad, selling or renting out the Israeli home, moving the center of activity, cancelling memberships — and documenting everything.

Form 1348 — The Residency Declaration

Anyone who meets one of the day presumptions but claims non-residency must attach Form 1348 to the annual return — a detailed declaration setting out the connections to Israel and abroad and reasoning the non-residency position. It is a critical document: it submits your termination claim to the assessing officer's substantive review, and careless drafting can seal the case. This is exactly where professional accompaniment is needed — it is not "another form", it is your statement of claim.

The Exit Tax — Section 100A

Terminating residency triggers one of the Ordinance's more surprising provisions: the exit tax. On the day before termination you are deemed to have sold all your capital assets — shares, options, crypto, company interests — and the notional gain is taxable. The law offers a choice:

• Immediate payment at termination; or
• Deferral — paying only upon actual sale, with the Israeli tax computed on the proportion of the holding period spent as an Israeli resident.

For holders of startup options and shares this is a critical relocation point: timing the termination against vesting schedules and an expected exit can change the tax dramatically. Plan before the move.

National Insurance — A Separate Termination

A common mistake: assuming that disconnecting from income tax also disconnects you from the National Insurance Institute. These are two separate tracks. Failing to arrange your National Insurance status means either accruing contribution debts (with fines), or losing rights — chiefly national health insurance — earlier than intended. A conscious decision is required: termination (with a waiting period upon return to health coverage) or continued voluntary payment — each has advantages depending on your plans.

Remote Work for an Israeli Employer — Double Caution

A fast-growing phenomenon: moving abroad while continuing to work remotely for an Israeli employer. This is a tax minefield — for both sides: when is the salary taxable in Israel and when in the new country? What are the employer's withholding duties? Does the employer acquire a "permanent establishment" abroad? The answers depend on the relevant tax treaty and the facts — and must be settled in advance, not in hindsight.

And Looking Ahead: Returning Residents

The other side of the coin: someone who lawfully terminated residency and stayed abroad long enough may, upon return, enjoy returning resident or veteran returning resident status (after 10 years) — with significant multi-year exemptions on foreign income and assets. Here too, planning starts on the day you leave: a well-documented termination is the foundation for the benefits on return.

The above article is provided for general information only and does not constitute professional advice or a substitute for specific consultation. Residency law is complex and highly fact-dependent. For any question, you are welcome to contact us.

Sincerely,
Hager-Alperowitz & Co. — Certified Public Accountants