Tax & Finance

Are directors' fees paid to a non-resident director of an Israeli company taxed in Israel?

Q: Are directors' fees paid to a non-resident director of an Israeli company taxed in Israel?

Yes, in most cases. Directors' fees paid by an Israeli company are treated as Israeli-source income under the Income Tax Ordinance [New Version] because they derive from office in a resident company, so they are taxable in Israel even if the director lives abroad and never visits. The company must withhold tax at source when it pays the fee. Most of Israel's tax treaties follow Article 16 of the OECD model, which lets the country where the company is resident tax a non-resident's directors' fees, while the home country gives relief to prevent double taxation.

      Yes, in most cases. Directors' fees paid by an Israeli company are treated as Israeli-source income under the Income Tax Ordinance [New Version], because they derive from office in a resident company, so they are taxable in Israel even if the director lives abroad and never visits. The company must withhold tax at source when it pays the fee. Most of Israel's tax treaties follow Article 16 of the OECD model, which lets the country where the company is resident tax a non-resident's directors' fees, while the home country grants relief to prevent double taxation.
    

Israeli income tax operates on a source basis for non-residents: a person who is not an Israeli tax resident is taxed here only on income with an Israeli source. Directors' fees (sechar directorim) are an unusual category because their source is tied to the residence of the paying company rather than to where the work is physically done. When an Israeli-resident company pays a director for serving on its board, the Israel Tax Authority treats that payment as Israeli-source income under the Income Tax Ordinance, regardless of where the director sat during the meetings. The paying company is a withholding agent under Section 164 and must deduct tax before remitting the net fee, accounting for it in its periodic returns.

For a foreign director the practical questions are the rate and the treaty. Absent a specific reduced-withholding approval, the company applies withholding at a high rate, and the director may then file to reconcile the final liability. A relevant double taxation treaty usually resolves the overlap: the directors' fees article, modelled on Article 16, generally preserves Israel's right to tax the fee at source while the director's home country either exempts it or grants a credit for the Israeli tax paid. It is worth separating directors' fees from a salary for executive services performed outside Israel, which can have a different source and treaty treatment. Our guide on Israeli withholding tax on payments to non-residents covers the mechanics and treaty rates.

⚖ In Practice

Governing law: Income Tax Ordinance [New Version], source rules and Section 164 (withholding); double taxation treaties, directors' fees article (Article 16)
Competent authority: Israel Tax Authority (Rashut HaMisim)
Source rule: directors' fees are Israeli-source because the paying company is resident in Israel, even if the director never enters the country
Withholding: deducted at source by the company; a reduced rate needs a specific approval or treaty relief
Double tax relief: treaty Article 16 typically lets Israel tax the fee while the home country gives an exemption or credit

From the full guide: Israeli Withholding Tax on Payments to Non-Residents

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Are directors' fees paid to a non-resident director of an Israeli company taxed in Israel?

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