Written by: Moshe Sister
For Israelis relocating abroad, one thorny issue is residency for Israeli National Insurance purposes. Should you terminate your Israeli residency? Should you remain an Israeli resident while living abroad, and continue making National Insurance contributions? If you wish to preserve your Israeli social security rights, can you simply continue making minimum contributions while living and working abroad?
Over the years, a common practice has developed among Israelis working abroad: they continue to make minimum National Insurance contributions in Israel, with the expectation that this will preserve their rights without requiring them to pay full National Insurance contributions on their foreign income.
A recent decision of Israel’s National Labor Court highlights an important risk associated with this approach: the very act of continuing to pay National Insurance contributions may be relevant in determining whether Israeli residency has actually been terminated.
Three Common Approaches During Relocation
Individuals relocating from Israel generally consider one of three approaches:
- Terminating Israeli residency. This is generally appropriate for individuals who intend to remain outside Israel for an extended period and intend to move their “center of life” outside Israel. If the termination of residency is recognized, the individual will generally cease to be subject to ongoing Israeli National Insurance contributions.
- Maintaining Israeli residency and continuing to pay National Insurance contributions. For a temporary relocation – for example, one to three years – an individual may continue to be treated as an Israeli resident, report accordingly and make National Insurance contributions, while maintaining the rights associated with Israeli residency.
- Paying minimum National Insurance contributions. A third practice has developed under which individuals living and working abroad continue paying only the minimum contributions applicable to an insured person with no income in Israel. The objective is typically to “preserve their rights” in Israel without paying full National Insurance contributions on their foreign income.
While the first two approaches have a relatively clear legal framework, the third is more problematic. Israeli law does not necessarily recognize an intermediate status under which an individual can be treated as a nonresident for purposes of paying National Insurance contributions while simultaneously retaining resident status for purposes of preserving National Insurance rights.
The Zander Decision
The Israeli National Labor Court recently addressed this issue in the Zander case. The case involved a couple who moved from Israel to Ireland intending to remain abroad for an extended period. They instead returned to Israel approximately three years later. While living in Ireland, the couple continued paying minimum Israeli National Insurance contributions, in part because they wished to preserve their rights in Israel.
Following their return, the National Insurance Institute reviewed their residency status for 2019 and determined that they had remained Israeli residents during the relevant period. As a result, they were required to pay full National Insurance contributions for that year.
The Regional Labor Court initially ruled in favor of the couple, finding that the objective circumstances demonstrated that their center of life had moved to Ireland. Among other factors, they worked in Ireland, purchased a home there, and took meaningful steps toward establishing their lives outside Israel.
The National Labor Court, however, reversed the outcome with respect to the relevant period.
Minimum Contributions May Be Evidence of Continued Residency
One of the significant aspects of the National Labor Court’s decision was the weight given to the couple’s decision to continue paying National Insurance contributions and preserve their Israeli social security rights.
The decision illustrates that paying minimum contributions is not necessarily a neutral administrative step designed solely to maintain coverage. It may also be viewed as evidence of the individual’s subjective intentions, specifically, that the individual continued to regard Israel as his or her center of life or, at least, had not yet made a complete break from Israeli residency.
The Court also emphasized that a change in residency may occur as a gradual process. Moving abroad, even when accompanied by meaningful steps toward establishing a new life in another country, does not necessarily mean that Israeli residency terminates immediately on the date of departure. An individual’s ties to Israel may weaken over time, with the center of life shifting abroad only at a later stage.
This distinction can be particularly important during the year of departure and the period immediately following the relocation.
Practical Implications for Israelis Relocating Abroad
The Zander decision does not establish that anyone who pays minimum National Insurance contributions automatically remains an Israeli resident.
Residency continues to depend on the individual’s overall circumstances, including place of residence, family, employment, assets, duration of the stay abroad, evidence of intention to establish a life abroad, and the nature and strength of the individual’s ties to both Israel and the destination country.
However, the decision makes one point particularly important: it may not be possible to have it both ways.
An individual who continues paying National Insurance contributions specifically to preserve Israeli residency-related benefits should recognize that this same conduct may later be relied upon as evidence that the individual did not terminate his or her Israeli residency.
The financial consequences can be significant. Even where it ultimately becomes clear that an individual established his or her center of life abroad, the National Insurance Institute may take the position that residency terminated at a date well after the relocation date. The individual could then face National Insurance liabilities based on income earned during the intervening period.
The Bottom Line
Relocation does not automatically terminate Israeli residency for National Insurance purposes, and paying minimum National Insurance contributions should not be viewed simply as a technical way to “keep the benefits” without other consequences.
Individuals should consider their National Insurance position as part of the relocation planning process.
In particular, following the recent National Labor Court decision, individuals should be cautious about automatically continuing to pay minimum contributions simply because this has historically been a common practice among Israelis working abroad.
The expected duration of the relocation, the individual’s intentions, the ties maintained with Israel, the ties established in the destination country, and the desired National Insurance status should all be considered together.
Careful planning at the outset of a relocation can help avoid an unexpected residency dispute – and potentially significant National Insurance liabilities – several years later.
