Do non-resident directors pay Israeli tax on their director's fees?

A foreign shareholder who sits on the board of their own Israeli company, joining meetings by video from abroad, often expects the modest director's fee to be taxed only back home. Israeli tax law, and most tax treaties, see it the other way. Directors' fees from an Israeli company are generally Israel's to tax, wherever the director happens to sit.

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Detailed Explanation

Two things are being taxed, and they are easy to confuse. A director's fee is remuneration for holding the office of director, distinct from a salary or a consulting fee for work actually performed for the company. The distinction matters because the source rules and the treaty articles treat them differently. Under the Income Tax Ordinance 1961, income tied to an office held in an Israeli company is Israeli-source, and the company must withhold tax when it pays. The wider question of a foreigner holding office in an Israeli company is set out in the note on a non-resident acting as sole director of an Israeli company.

The treaties reinforce Israel's claim rather than override it. The directors' fees article in most of Israel's double-tax treaties, following the OECD model, lets the country where the company is resident tax fees paid to a board member, regardless of where the director carried out the role. So a director in New York, London, or Sydney drawing a fee from an Israeli company is normally taxable in Israel on that fee, then relieves any double taxation by claiming a foreign tax credit at home. This is a narrower rule than the one for ordinary employment income, which usually follows where the work is done.

For the company, the obligation is administrative and unavoidable. It must operate withholding on the fee, report it, and give the director the documentation needed to claim relief abroad. For the director, the practical work sits at home: matching the Israeli tax paid against the home-country liability so the same fee is not taxed twice in full. Keep the Israeli withholding certificates, because a foreign tax authority will want evidence of the Israeli tax before allowing a credit. If the same person also earns a genuine salary for services performed for the company, that portion is analysed separately and may be sourced where the work is done.

The frequent mistake is paying a non-resident director gross, with no Israeli withholding, on the assumption that a foreigner abroad is beyond Israeli tax. That leaves the company exposed to the unpaid withholding plus interest and penalties, and leaves the director with an Israeli filing problem. Setting the withholding up correctly from the first payment is far cheaper than fixing it later.

In Practice: Under the Income Tax Ordinance 1961 an Israeli company must withhold tax on directors' fees paid to a non-resident, and the directors' fees article of the relevant tax treaty generally lets Israel tax them regardless of where the director sits. On an annual fee of NIS 120,000, withholding at marginal rates can reach tens of thousands of shekels, remitted to the Israel Tax Authority monthly, with the director claiming a credit at home.

Key Considerations

• Directors' fees from an Israeli company are usually taxable in Israel even for a non-resident director.
• Most treaties assign directors' fees to the company's country of residence, not the director's.
• The Israeli company must withhold tax at source and report the payment.
• A director's fee is analysed separately from salary for work actually performed.
• The director claims a foreign tax credit at home using the Israeli withholding certificates.

When to Consult a Lawyer

This question typically requires professional legal advice when:

• The company has been paying a non-resident director gross and needs to correct the missing withholding before an audit.
• A director draws both a fee and a salary and the two must be sourced and taxed correctly.
• A home-country tax authority is refusing a credit for Israeli tax and you need the treaty position documented.

A qualified Israeli attorney or tax adviser should structure director remuneration before the first payment is made.

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Speak With an Israeli Attorney

We set up correct withholding on directors' fees, separate board fees from salary for cross-border tax, and document the treaty position so a foreign credit claim holds up.

Contact us for a confidential initial consultation.