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How is an Israeli resident taxed on salary earned while posted abroad by an Israeli employer?

Israel taxes residents on worldwide income under Section 2 of the Income Tax Ordinance [New Version] 5721-1961, so the salary remains fully taxable in Israel while the employee is still an Israeli resident, even though the work happens overseas. A separate set of regulations for employees posted abroad, in force since 1982, replaces the ordinary payroll calculation and allows defined deductions for host-country housing, schooling and medical insurance. Foreign tax paid on the same salary is relieved through the foreign tax credit. Residency ends only when the centre of life genuinely moves, which a fixed-term posting rarely achieves.

Two questions decide the outcome and they are separate. The first is residency: Section 1 of the Ordinance defines an Israeli resident by centre of life, supported by day-count presumptions, and an employee sent abroad by an Israeli employer while keeping a home, family and social ties in Israel almost always remains resident. The second is the mechanism. The Income Tax Regulations (Deductions from Wages Paid Abroad) 5742-1982 apply where an Israeli employer posts a resident employee overseas for a qualifying period. They convert the salary at a prescribed rate, allow specified deductions for rent, schooling for the employee's children and health insurance abroad, and apply their own tax table, with the employer withholding accordingly.

The regime is often less generous than employees expect, because the deductions are capped by regulation rather than measured by actual cost, so it rarely removes Israeli tax on a high salary. National Insurance is a separate calculation again: an Israeli resident posted abroad by an Israeli employer generally keeps paying Bituach Leumi and retains health coverage, and a totalization agreement with the host country may decide which system collects. Where the host country also taxes the salary, relief comes from the foreign tax credit or the applicable treaty, but the credit is limited to the Israeli tax attributable to that income. An employee who intends the move to be permanent should document the change of tax residency from the outset.

⚖ In Practice
  • Governing law: Sections 1 and 2, Income Tax Ordinance [New Version] 5721-1961; Income Tax Regulations (Deductions from Wages Paid Abroad) 5742-1982
  • Competent authority: Israel Tax Authority (Rashut HaMisim BeYisrael); National Insurance Institute (Bituach Leumi) for social security
  • Who the regulations cover: an Israeli-resident employee posted abroad by an Israeli employer, typically on a continuous assignment of four months or more
  • Deductions allowed: host-country rent, tuition for the employee's children and medical insurance, each subject to a statutory ceiling rather than actual expenditure
  • Double taxation: foreign tax credit capped at the Israeli tax attributable to the foreign salary, or treaty relief where a treaty applies
  • Reporting: an annual Israeli return is generally required for the posting years even where the employer withheld correctly

From the full guide: Tax Residency in Israel: How It Is Determined

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