What is a residency termination report and who needs to submit it?
Residency termination is a process that is carried out following relocation abroad or work-related travel, for example, to Europe, with the goal of avoiding the need to report income and pay taxes twice. These taxes include health tax, income tax, and national insurance fees. As long as you are a resident in Israel, you must report all your income and pay taxes on them, even if you are paying taxes abroad. The purpose of the residency termination report is precisely to avoid double taxation, which is a type of mistake that can occur even if there is a tax treaty between the countries. In this article, we will try to answer all the questions about how to submit a residency termination report and who needs to do it.
Residency termination and how to do it
Residency termination for income tax purposes, unlike termination from the National Insurance Institute, is an action that is intended to cancel your residency in Israel for tax purposes after relocation or emigration abroad. After submitting a residency termination report, you are not required to pay taxes or report income you have earned outside Israel from the date the residency termination takes effect, except in exceptional cases.
For example, if you start earning income abroad after leaving the country and have legally terminated your residency in the income tax authorities, you will not be liable to pay taxes in Israel and you will not have to report income earned outside the country after the date of the residency termination. However, it is important to emphasize that residency termination is not a direct result of living abroad and does not occur at the moment of boarding a plane. You need to submit a residency termination report to actually stop being considered a resident for tax purposes in Israel.
Who needs to submit a residency termination report
There are no official guidelines or a systematic practice in this regard. Generally, a foreign resident without income in Israel does not need to submit an annual report. However, there may be a dispute about the timing of the residency termination. This may be determined based on several parameters, including the nature of the relationship between Israel and the destination country where you reside. There is also a difference if you were self-employed or employed before deciding to leave.
You may need to submit an annual report until you submit a residency termination report. To do so, you will need to declare that you live abroad and are not an Israeli resident. You pay taxes abroad and consume services there, not in Israel. There is something called the "center of life," meaning in which country you live in principle, where your real residency is, such as your residence, workplace, assets, etc. If all of these are outside Israel, it will be easy for you to prove the residency termination.
When is the residency termination performed
Generally, the position of the tax authorities is that residency termination is not done immediately upon emigration but takes a long period of time, for several months or even a year. The problem is that after the decision is made, the termination is done retroactively from the day you no longer live in Israel. This should be taken into account if you plan to return.
However, there are exceptions. The process is significantly shortened when moving to a country that has signed a treaty with Israel, as well as in cases where the termination is made immediately upon physical relocation.
In summary, if you are self-employed, it is reasonable that you still want to submit an annual report in the year you claim you have terminated your residency for tax purposes, even if the date is in the year of the transition. It is advisable to consult with a company that supports those who relocate regarding the question of when to terminate residency. We at TOGETTHERE will be happy to advise you on this matter.