Your
Taxes: Taxation of Telecommuters
LEON
HARRIS , THE JERUSALEM POST
Telecommuters are people who live and work in Israel for a company based abroad
that is not registered in Israel. This is now easy thanks to e-mail, the Internet
and cheap videoconferencing. But there can be a number of tax implications for
the individual and the company, in Israel and abroad. Why? Let's
suppose you are resident in Israel and employed by a New York-based software corporation
called ABCD Inc. One day you supply services worth $100 and the resulting software
product is supplied to a California customer for $1,000. The Israel Tax Authority
will want to tax your $100 and perhaps also the $900 profit of ABCD Inc. This
is because Israel tax treaties with the US and other countries let Israel tax
the Israeli source profits of a "permanent establishment" in Israel.
A permanent establishment is any "fixed place
of business" or branch - even a room in your home, or a "dependent agent"
- such as an employee. In other words, ABDC Inc. is doing business in Israel through
you and it must pay the 27 percent Israeli company tax on Israeli source profits
you generate. This may not be what ABCD Inc. bargained
for even if the tax is creditable abroad. The same issues occur in the US or elsewhere
when an Israeli hi-tech start-up hires a few employees in a foreign country. Given
this, what are the options? There are at least four: •
You become a self-employed (independent) contractor of ABCD Inc.; •
You set up your own company which contracts with ABCD Inc.; •
ABCD Inc. opens a branch office in Israel and employs you; •
ABCD Inc. opens a subsidiary company in Israel and employs you. Each
of these scenarios has its pros and cons. If
you became a self-employed independent contractor This
implies you may also have other customers (otherwise ABCD Inc. may still be exposed
to Israeli tax). You will presumably not enjoy the legal benefits of being an
employee, such as vacation or severance pay. But check this with a lawyer. Self-employed
contractors pay income tax at rates ranging up to 47% (in 2008) and social security
(National Insurance Institute) payments at graduated rates ranging up to 16.05%
on the first NIS 36,760 of income per month. However, the impact is mitigated
as 52% of social security payments by a self-employed contractor are deductible
for income tax purposes in the year they are paid, resulting in a net effective
rate of around 13%. Other expenses incurred wholly
and exclusively in the production of taxable income are also deductible, subject
to detailed rules for some items such as travel and entertainment expenses. You
will be required to keep accounting records on software approved by the Israel
Tax Authority. Upon starting up you will need to
register for Israeli income tax, social security and VAT purposes. You will then
be asked to pay tax and VAT installments, usually by the 15th day after each month-end
(possibly bimonthly in smaller cases). The Israeli
tax year is the calendar year. You will be required to file annual tax returns
by April 30 if you keep "single entry" accounting records, or May 31
if you keep "double entry" accounting records. However,
extensions are obtainable, particularly if you hire an accountant who participates
in an arrangement of the Tax Authority's to spread the filing of clientele tax
returns over a period of up to 13 months after the year-end. Self-employed
contractors and company owners are periodically asked to file capital returns
of all their personal assets. This is an enforcement measure as there is no annual
wealth tax in Israel nor is there an estate or inheritance tax (only capital gains
tax when assets are sold). There may also be a 15.5%
VAT liability on your billings to ABCD Inc.; this applies if your services relate
to assets in Israel or residents of Israel or foreign residents in Israel or an
agreement involving an Israeli resident party (among others). If
you are a US citizen or a non-Israeli resident, you will have to claim a foreign
tax credit for Israeli tax on Israeli source profits against taxes in the other
country - Israel gets "first bite of the tax cherry." US citizens can
also claim an "exclusion" (exemption) from US federal tax on Israeli
source earned income up to certain amounts if various conditions are met. Please
consult your US CPA. If you set up your
own Israeli corporation The corporation
could provide services in Israel to ABCD Inc. It will generally be subject to
company tax at 27% on its profits. As the main shareholder, you will also pay
25% tax, generally, on dividends received from the corporation. If you use a non-Israeli
corporation formed before you become an Israeli resident, special rules may enable
you to claim an exemption for new residents for five years. If
the corporation pays you salary (and perhaps bonuses), tax will be withheld at
source at graduated rates ranging up to 47%. Social security will also be payable
on the first NIS 36,760 per month at rates ranging up to 12% (employee's contribution)
and 5.43% (employer contribution). Alternatively,
you may file an election for your corporation to be treated as a "family
company" if it is owned by members of one family and the election is filed
within three months after its incorporation - or by November 30 for the election
to commence in the following tax year. If you elect "family company"
status it is not taxed; instead the largest shareholder is taxed at individual
tax rates (up to 47%, etc). Social security will also apply at various rates applicable
to dividends even if no dividend is actually paid. Other monthly and annual accounting
and reporting requirements also apply to all corporations (see above) and an annual
audit is also needed. If you are an employee
of ABCD Inc. or its Israeli subsidiary Tax
and social security will be withheld at source from your salary. As mentioned,
the company tax rate in Israel for corporations doing business in Israel is currently
27%. There will also be VAT and reporting obligations and a need to establish
a reasonable business model and arm's length "transfer pricing" between
the Israeli office and the group abroad. Dividends
to a foreign parent corporation will be subject to a 25% withholding tax unless
reduced by any tax treaty - for example 12.5% to regular US parent corporations.
There may also be VAT on billings. The above is
only a brief summary and many additional considerations may be relevant. As
always, consult experienced lawyers and tax advisors in each country at an early
stage in specific cases. leon.harris@il.ey.com
Leon Harris is an international tax partner
at Ernst & Young Israel. (c)
Leon Harris
Ernst & Young Israel
Partner, International
Tax Services
23, Aminadav Street, Tel-Aviv 67067, Israel
Tel:
972-3-6278 660 / 972-3-6278 601
Cell: 972-54-266-1205 / 972-54-644 9398
Fax: 972-3-56 33 424
Email: leon.harris@il.ey.com
/ leonharr@gmail.com | 
