Paying salaries to Israeli employees who travel abroad and employees who arrive to work in Israel

Today’s world is defined as a “global village,” which requires our firm to adapt to today’s global economic reality. Accordingly, our offices provide consulting services to companies and individuals, for the purpose of building payroll systems for employers from Israel who have employees travelling abroad and employees arriving to Israel. We assist in identifying company and employee tax exposures, providing services that meet those needs, and assisting the company and employees with regard to building payroll systems. We also assist in representing the company and its employees vis-à-vis the tax authorities and National Insurance Institute of Israel.

When a multinational company launches a presence in a foreign market by opening a local office, facility or plant, it is usually required to register a branch, representative office or subsidiary in with local authorities to do business legally and to hire and pay local staff or employees sent by the company abroad. In most cases, clients must register a corporate presence in that place, open local taxpayer portfolios, and add the employees to the local taxpayer circle.

One of our customers is a company in the field of gas and oil exploration – the company employs workers around the world. In Israel, the company employs workers in the gas rigs in the Mediterranean.

An accounting firm from Scotland contacted us on behalf of this company to represent the company in Israel with regard to the deduction of income tax and National Insurance from the employees.

According to Taxation Decision No. 8679/13: Drilling Activities in Israel’s Economic Water – Taxation Decision in the Agreement, following are the Case Facts: “The Company has signed an agreement to provide drilling services to an Israeli company that is part of an international group of companies, which owns several search licenses in the area. As part of the project, the company will lease offices in Israel for the provision of secondary services for the rig activities, including support services for the rig operations, for which a limited number of workers, some foreigners and some residents of Israel, will be employed. The project on the rig will be carried out through staff teams, the vast majority of them will not be residents of Israel. The employees of the rig will work and remain on the rig, and they are not expected to stay in Israel beyond their work on the rig. Among the employees of the rig, some residents will have Treaty protection to avoid double taxation, and some are residents of countries with whom Israel has no treaty.”

Special tax rules for “foreign expert”

With regard to income tax, these employees are considered “foreign experts”. According to the law there are special taxation rules for a “foreign expert”:

In the Income Tax Regulations (deduction of residence expenses for foreign residents), 1979 “foreign expert” is defined as a foreign worker in which all of the following exist:

1- He stays in Israel or in the area lawfully.

2- He was invited outside of Israel by a resident of Israel who is not a manpower contractor or manpower broker to provide service to the same resident of Israel in the field where the foreign resident has unique expertise.

3- During his entire stay in Israel or in the region, he was employed or served in his unique field of expertise.

4- For his services, he was paid income in excess of NIS 10,000 per month (multiplied by the number of months he was in Israel), which was subject to his income tax lawfully.

A foreign expert is entitled to a deduction from his income, during his stay in Israel (but not more than 12 months). This includes the expenses of eating, drinking and accommodation. (He is not eligible for credit points where a foreign worker is eligible).

The employer of a foreign worker owes a levy on the employment of foreign workers, at a rate of 10% of the salary paid to the foreign worker. This levy does not apply to the employment of a foreign worker who has earned at least twice the average economic wage (regardless of whether he is a foreign expert).

With regard to National Insurance, workers who are onshore in the State of Israel (and not at sea rig) are required to pay National Insurance. In our case, there are actually one or two employees working onshore in Israeli offices for the purpose of providing secondary services for the rig operations, including support services for the rig operations. These workers are required to pay National Insurance. It should be noted that the workers who work on the rig at sea and not on land are not obliged to pay National Insurance.

Another case: one of our clients is a company engaged in locating laborers (mainly butchers) and professionals in the meat industry and placing them in employment in Israel or abroad. The company pays their salaries and social conditions and all costs related to their employment conditions. The company has between 40 and 100 employees in slaughterhouses abroad, deployed in approximately 13 countries in South America. Each time a slaughterhouse team goes abroad, 101 forms and contracts are sent to the wage administrator. The wage administrator performs the salary calculation, including National Insurance, income tax, expenses of eating drinking and accommodation and pension payments. Then, salary slips are issued to employees and their salary is paid directly through the bank.

Income of residents of Israel generated or derived abroad                                  (Income Tax Ordinance Section 3A)

A resident of Israel is liable to tax on his income generated or derived in Israel and abroad.

Rules are set that allow deduction of certain expenditures on foreign income generated abroad (details – see below in the article.) The tax on income of a resident of Israel employed abroad by an Israeli employer is calculated, under certain conditions, differently from the tax calculations for workers in Israel. The salary department in our offices calculates the tax, deductions, credits and discounts according to the Income Tax Rules (for those with income from work abroad) as well as the tax on income (basic salary and National Insurance) for those with only Israeli income. Regulations on this matter require us to provide employees an annual approval with the required details.

Travel expenses: Eating, drinking and accommodation – Travel and accommodation expenses are only allowed for slaughterers for travel from a foreign country to a country other than the State of Israel. Expenditures are authorized in the State of Israel in accordance with the Income Tax Determination (Owners of Income from Work Abroad) (Determination of Basic Salary and Expenditures), and as defined in Regulation 2 of the Income Tax Regulations (deduction of certain expenses), 1972.

Expenses abroad

1. Work-related expenses

Travel abroad:  within the framework of the work, a deduction is permitted if travel and stay are necessary for the production of income.

The expenses will be allowed as follows:

A.1 Housing and accommodation – For a stay abroad of less than 90 nights’ travel, the expenses will be deducted as follows: If there were less than 7 nights, the full expense will be allowed according to receipts, but not more than $ 278 for one accommodation. If there were more than 7 nights, from the eighth night onwards, all accommodation expenses up to $ 122 per night will be allowed. For accommodation that costs more than $ 122, 75% of the accommodation expenses are allowed but not less than $ 122 per accommodation nor more than $ 208 per accommodation. If the trip included more than 90 nights, the accommodation expenses are authorized as incurred on receipts but not more than $ 122 per accommodation will be allowed. For the purpose of calculating the number of overnight stays, it was determined that 2 or more trips that did not include a continuous stay in Israel of at least 14 days are considered one trip, and the expenditure will be recognized accordingly.

A 2. Travel expenses – The butchers must provide a receipt for the amount spent to purchase the tickets abroad. Expenditure for the ticket price is permitted, but no more than the price of a ticket for this type of flight in a business class, subject to the circumstances.

A.3 Other accommodation expenses – If other accommodation expenses are required, the amount due for these expenses is not more than $ 78 per day spent abroad. If no accommodation expenses are required, no more than $ 130 per day is allowed.

Wage experts in our payroll department provide payroll services efficiently and with maximum accuracy, while adhering to uncompromising schedules and professionalism.