My Israeli company closed owing tax. Can the Israel Tax Authority come after me personally in the United States?

A founder in New York winds down a small Israeli subsidiary, stops filing, and hears nothing for two years. Then a demand arrives at an old address naming him personally for the company's whole tax and VAT balance. The corporate wall did not fail. Israeli tax law simply has two named routes around it, and whether either one applies is a question of what actually left the company and who actually ran it.

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Detailed Answer

Section 119A of the Income Tax Ordinance allows the Israel Tax Authority to collect a company's tax debt from a shareholder who received the company's assets without adequate consideration, and from a controlling shareholder in defined asset transfer situations, where the transfer left the company unable to meet its tax. The trigger is a gratuitous or undervalued transfer that stripped the company and defeated the tax, and the burden then runs to the recipient to show that value was given. Section 106 of the Value Added Tax Law 1975 works differently. It reaches the active manager (menahel pa'il) of the business for an unpaid VAT debt where the debt cannot be collected from the company itself and the manager was bound up in the circumstances of the default. Neither section applies automatically to anyone who happened to own shares, and neither is a general rule that owners answer for corporate tax.

That is where most non-resident files are actually won. On the Section 119A side, the analysis is documentary: what were the company's final outflows, and were they consideration or a gift. A recorded salary cycle at arm's length is consideration. Repayment of a shareholder loan the founder genuinely advanced years earlier is repayment of a debt, not a distribution of assets for nothing. On the Section 106 side, the question is factual and often decisive for a non-resident. Where day to day operations were run by a local director and a bookkeeper in Israel while the owner sat abroad as a shareholder, that owner is not the active manager the VAT Law reaches, whatever the shareholding percentage says. A demand issued in the absence of any response tends to assume the worst version of both sets of facts, because nobody has supplied the better ones.

Cross-border enforcement is the part American owners misjudge in both directions. An Israeli tax judgment is not directly enforceable against a person resident in the United States, because courts do not collect one another's tax debts. That is not the end of the exposure. A stay of exit order under the Taxes (Collection) Ordinance can be placed the moment the debtor enters Israel, which for an owner with family, property or a business there is the leverage that matters, and an open personal file also complicates any future Israeli banking or corporate filing. Resolve it before the next visit rather than after being stopped at the airport. This is a different question from ordinary directors' liability under the Companies Law, which is addressed in our answer on a non-resident director's personal liability for an Israeli company.

In Practice: Section 119A of the Income Tax Ordinance bites only where a company transferred assets without adequate consideration and was left unable to meet its tax, with the burden on the recipient to show value was given, and Section 106 of the Value Added Tax Law 1975 reaches only the active manager of the business. An objection to a Section 119A determination runs to the Israel Tax Authority's collection unit, and a substantive file of this size typically takes 4 to 8 months to resolve. On a real non-resident file, a combined VAT and withholding demand of about NIS 520,000 was reduced to a settlement of NIS 70,000 once the payroll and shareholder loan records were produced, with the withholding element withdrawn in full and the stay of exit risk cleared.

When to Consult a Lawyer

• A personal demand has arrived and you have not yet answered it, because these determinations are built on assumed facts and the window to replace them with records is early, not at the enforcement stage.
• The company repaid you a shareholder loan or paid you salary in its final year, since those are exactly the payments the Authority characterises as asset transfers unless the loan agreement, the bank entries and the payroll filings are put in front of it.
• You plan to travel to Israel while an unresolved personal tax file exists, given that a stay of exit order can be issued once you are in the country and lifting one from inside Israel is far harder than clearing the file beforehand.

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Speak With an Israeli Attorney

We pull the assessment and the collection file, rebuild the company's final years from the accounts, and put the Section 119A and Section 106 arguments to the Authority before enforcement starts, including clearing the stay of exit exposure ahead of your next trip.

Contact us for a confidential initial consultation.