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How is an Israeli pension taxed when it is paid to someone living abroad?

A pension built up from Israeli employment keeps its Israeli source when the recipient moves abroad. Section 4A of the Income Tax Ordinance [New Version] 5721-1961 locates pension income where the payer is resident, so the Israeli fund withholds Israeli tax before transferring the money. Section 9A then exempts a defined slice of a qualifying pension once the recipient reaches retirement age, with the exempt percentage set by statute. A tax treaty can shift the taxing right to the country of residence, but only once the recipient obtains a reduced-rate or exemption certificate from the assessing officer.

Israeli tax on a non-resident reaches only Israeli-source income, and the source rules in Section 4A decide what counts. A monthly annuity from an Israeli pension fund, provident fund or insurance policy is Israeli-source because the payer sits in Israel and the underlying employment was performed there. The fund acts as a withholding agent, deducting tax at the rate on its file and remitting it to the Israel Tax Authority. Section 9A softens the result for retirees by exempting a percentage of a qualifying pension up to a statutory ceiling, with the percentage rising in stages fixed by legislation. Anything above the exempt slice is taxed at ordinary marginal rates.

Most of Israel's roughly sixty tax treaties assign private pension income to the country where the recipient lives, while pensions paid for government service usually stay taxable in Israel. The treaty does not apply itself. The retiree files an application with the assessing officer for non-residents, supported by a certificate of tax residence from their home revenue authority, and the office issues a certificate telling the fund what to withhold. Certificates are time limited and generally need renewing each year. Until one is in place the fund withholds at the full rate, and recovering the excess means filing an Israeli return. Anyone weighing a lump sum instead should first read the rules on withdrawing an Israeli pension after leaving, because the treatment differs sharply from a monthly annuity.

⚖ In Practice
  • Governing law: Sections 2(5), 4A and 9A, Income Tax Ordinance [New Version] 5721-1961
  • Competent authority: the Israel Tax Authority (Rashut HaMisim), assessing officer for non-residents; the paying fund acts as withholding agent
  • Treaty relief: Israel has around 60 double taxation treaties, most of which give the residence country the right to tax a private pension
  • Documents: a certificate of tax residence from the home tax authority plus an application to the assessing officer; allow 2 to 4 months for a decision
  • Renewal: reduced-rate and exemption certificates are issued for a fixed period, commonly one year, and lapse if not renewed
  • Watch out: without a valid certificate the fund withholds at the full rate, and the only route back is an Israeli tax return for that year

From the full guide: Withdrawing Your Israeli Pension When Leaving Israel: A Complete Tax Guide for Expats

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Get a Free Consultation with Adv. Eli ShimonyPrepared under the direction of Adv. Eli Shimony, Eli Shimony Law Office · Editorial policy

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