Example of a salary split between Belgium and Israel
The salary split consists of dividing one taxpayer’s taxable income between several jurisdictions. It mostly relies on the application of international double taxation conventions entered into by most OECD countries.
The idea is to also become taxed abroad and thus obtain a tax exemption of this income in Belgium. This always results in reducing the overall tax burden of the taxpayer as 2 or more tax exempt portion of the income will apply, lower progressive or marginal tax rates, favorable tax regimes and last but not least, lower social security contributions as Belgium ranks on the worlwide podium on this.
A salary split may be applied to either self-employed, administrators or employees.
Taxation in Israel for Belgian residents
1. Israeli tax regime
The principal taxes in Israel are income tax, capital gains tax, VAT and land appreciation tax.
1.1. Definition of Israeli tax resident
Israeli residents are taxed on their worldwide income, while non-residents are taxed only on their Israeli sourced income which is income accrued or derived in Israel.
An Israeli resident is defined as an individual whose center of living is in Israel, taking into account the person’s family, economic and social links, including the following considerations:
- Permanent home;
- Place of residence of the individual and his or her family;
- Habitual place of business or permanent place of employment;
- Place where assets and investments are located;
- Place of memberships in organizations, associations and institutions.
Under the law, a rebuttable presumption of Israeli residency will apply in either of the following circumstances:
- The individual is present in Israel at least 183 days in a tax year ending 31 December;
- The individual is present 30 days in the current tax year and a cumulative total of 425 days in the current and two preceding tax years.
1.1.1. Israel income taxes and tax law in 2013
Individual income tax rates in 2013 are 10%-50%.
Personal income tax (for both the employed and self-employed) is a progressive tax starting at 10% and increasing to a maximum of 50%.
The following table summarizes the rates:
|TAX %||INCOME (ILS)||INCOME (€)|
|10%||1,00 – 63.630,00||0,01 – 13.615,00|
|14%||63.631,00 – 108.120,00||13.615,01 – 23.133,00|
|21%||108.121,00 – 168.000,00||23.133,01 – 35.955,00|
|31%||168.001,00 – 240.000,00||35.955,01 – 51.364,00|
|34%||240.001,00 – 501.960,00||51.364,01 – 107.455,00|
|48%||501.961,00 – 811.560,00||107.455,01 – 173.664,00|
|50%||811.561,00 – over||173.664,01 – over|
The Israel social security payments are subject to a monthly ceiling of 42.435,00 ILS (around 9.084,00 €).
National insurance contributions are generally payable on taxable income as calculated for income tax purposes.
The top rates of social security contributions are:
- Employer – 6.5%
- Employee – 12%
- Self-employed pay 9.82% for monthly incomes of up to 5.297,00 ILS (1.133,87 €) and 16.23% on the excess up to 42.435,00 ILS (9.084,00 €).
1.1.3. Israel tax exempt income
There are several classes of income that are tax-exempt:
- Income of a Disabled person – 100% disability: the person is exempt from tax to an annual limit of 602.400,00 ILS (129.000,00 €);
- Rent from a residential apartment: limited to 4.980 ILS a month (1.066,00 €)
- Profit on the sale of an apartment
- Prizes, Inheritances and gifts
- Severance pay: the limit of the monthly sum that is exempt from tax is 12.120,00 ILS (2.594,13 €).
1.1.4. Israel tax reductions
Tax relief is granted in certain circumstances. The relief may be expressed as tax deduction when the relief is granted by reducing the amount of income that is taxable or by the grant of a tax credit when the benefit is deducted directly from the tax due.
The tax reductions might be:
- • Payments for Life insurance, Providence funds
- • Investments in funding for scientific research
- • Investment in searching for oil
- • Investment in an Israeli film
- • Incapacitated family member
- • Residents of Border Settlements, developments areas.
The standard VAT rate in Israel is 17 %. The VAT applies to most goods and services, including imported goods and services.
Since 2012, the e-filling is mandatory.
3. Comparison of a situation where a consultant works both in Israel and Belgium
In Israel, remuneration is taxed from the 1st Shekel perceived. However, the brackets of taxation are more favorable in Israel than in Belgium. While in Belgium you will be taxed at the rates of 50% for any incomes above 36.300 € (tax year 2013), in Israel the 50% rates only applies to incomes over 173.664,01 €.
3.1. Belgian tax resident working in Israel
In a situation where the consultant is a single Belgian tax resident with no children and who perceives a monthly remuneration of 6.000,00 € with VAT, the worker can be considered a Israeli non-resident if a part of his income is accrued or derived from Israel. In such a case, the monthly remuneration can be taxed for a part in Belgium and for another part in Israel.
The following table summarizes different situations where the consultant has a yearly remuneration of 72.000 € and that he perceives 100%, 90 % or 75% of his remuneration in Belgium and the other 10 % or 25 % are perceived in Israel. In order to calculate the cost of social security, a lump sum amount of costs has been applied.
|Percentage of split salary in Israel||Take home salary in Belgium|
|0 %||35.737,28 €|
|10 %||32.146,95 €|
|25 %||27.985,60 €|
When the total of income is perceived in Belgium, the consultant only ends up with a take home salary of 35.737,28.
Thanks to our tax and social security optimization, the net take home salary may be improved as follow:
|Percentage of split salary in Israel||Take home salary||Total net take home salary||Advantage from a remuneration of 100 % in Belgium|
|Belgium||Israel||Belgium + Israel|
|0%||35.737,28 €||0 €||35.737,28 €|
|10 %||32.146,95 €||6.948,00 €||39.094,95 €||3.357,67 €|
|25 %||27.985,60 €||16.298,04 € €||44.283,64 €||8.546,36 €|
Hence, the tax and social security savings for a 25 pc split salary with Israel is 8.546,93 €.
3.2. Israeli tax resident working in Belgium
As Belgium does not tax any income received by a local employee from the first cent but applies a tax exempt portion of 8.590,00 € and progressive tax rates, Israeli tax residents may also benefit from a split salary structure with Belgium (or France or Luxemburg,…or with any country that Israel has entered into)
In order to do so, the information concerning the consultant taken in the example above applies mutatis mutandis to the case.
|Percentage of split salary in Belgium||Take home salary in Belgium|
|0 %||48.678,24 €|
|10 %||49.184,12 €|
|25 %||52.544,34 €|
Thanks to the advantageous tax brackets and rates in Israel and the minimum amount of income free of tax in Belgium, the take home salary is higher in the situation where the consultant is a Israeli tax resident working in Belgium part of his time.
The total take home salary is summarized in the following table:
|Percentage of split salary in Belgium||Take home salary||Total net take home salary||Advantage from a remuneration|
of 100 % in Belgium
|Israel||Belgium||Israel + Belgium|
|0 %||48.678,24 €||0 €||48.678,24 €||12.940,96 €|
|10 %||44.783,64 €||4.400,48 €||49.184,12 €||13.446,84 €|
|25 %||38.950,44 €||13.593,90 €||52.544,34 €||16.807,06 €|
The comparison of the two situations shows that a consultant will have a net take home salary higher when being an Israeli tax resident working in Belgium than the opposite.
We hereunder summarize the advantages for both Belgian and Israeli tax resident.
The split salary allows the worker and/or employee or director to reduce both taxes and social security in Belgium. This gives an advantage that is summarized in the following table:
3.3.1. Belgian tax resident
|Percentage of split salary in Israel||Total taxes and social security in Belgium||Net take home salary in Belgium||Economy of social security and taxes in Belgium|
|0 %||36.262,72 €||35.737,28 €||0 €|
|10 %||32.653,05 €||39.099,95 €€||3.609,67 €|
|25 %||26.014,40 €||44.283,64 €||10.248,32 €|
3.3.2. Israeli tax resident
|Percentage of split salary in Belgium||Total taxes and social security in Israel||Net take home salary||Economy of social security and taxes in Belgium|
|0 %||23.321,76 €||48.678,24 €||8.940,96 €|
|10 %||20.016,36 €||49.184,12 €||16.246,36 €|
|25 %||15.049,56 €||52.544,34 €||21.213,16 €|
4. 100 % compliant solutions
The salary split is a system of dividing the remunerations of an individual based on Convention for the avoidance of double taxation concluded by OECD countries and on the progressivity of the tax rates.
The objective is to transfer the right to tax to other jurisdictions than the home country of the individual so that the home country is deprived of the right to tax the incomes already taxed abroad.
This necessarily results in reducing the overall tax burden on the worldwide remunerations received by the individual.
Since Belgium has signed a Convention for the avoidance of double taxation with Israel (and around 99 other countries, Israel having entered into 50), it is easy to create a split salary based on article 15 or 16 of the Convention.
This International Treaty aims at determining which of the two States has the power to tax the incomes of a worker when he resides in one State and perceives incomes from the other contracting States.
4.1. Salary split for employee
The principle is stated in article 15 of the Convention for the avoidance between Belgium and Israel which states that:
“Subject to the provisions of Articles 16, 18 and 19, salaries, wages another similar remuneration derived by a resident of a Contracting State in respect of an employment shall be taxable only in that Contracting State unless the employment is exercised in the other Contracting State. If the employment is so exercised, such remuneration as is derived therefrom may be taxed in that other Contracting State.
Notwithstanding the provisions of paragraph 1, remuneration derived by a resident of a Contracting State in respect of an employment exercised in the other Contracting State shall be taxable only in the first-mentioned Contracting State, if:
(a) it relates to an activity exercised in that other Contracting State during a period or periods – including the duration of normal work interruptions – not exceeding in the aggregate 183 days in the calendar year concerned, and
(b) the remuneration is paid by, or on behalf of, an employer who is not a resident of that other Contracting State, and
(c) the remuneration is not borne as such by a permanent establishment or a fixed base which the employer has in that other Contracting State.
Notwithstanding the provisions of paragraphs 1 and 2, remuneration in respect of an employment exercised aboard a ship or aircraft operated in international traffic may be taxed in the Contracting State in which the place of effective management of the enterprise is situated”.
From the reading of article 15, the remuneration of an employee is taxable in the State of residence unless the activity is exercised in the other State. The activity must be effective in the other state which means that the physical presence in the other State must be proved.
However such requirement does not exist for the director of a company incorporated in the work State (article 16). In this case, it is only necessary to prove the reality of the director’s mandate.
4.2. Salary split for director
The basis for a salary split is to be found in article 16 of the Convention which states:
“Fees and other remuneration derived by a resident of a Contracting State in his capacity as a member of the board of directors of a company which is a resident of the other Contracting State may be taxed in accordance with the provisions of Article 15 as if the remuneration were remuneration of an employee to respect of an employment and as if referenties to the employer were references to the company.
The remuneration which a person to whom paragraph 1 applies derives from the company in respect of the discharge of day-to-day functions of a managerial or technical nature may be taxed in accordance with the provisions of Article 15 as if the remuneration were remuneration of an employee in respect of an employment and as if references to the employer were references to the company”.
In principle, the power to tax directors’ fees is allocated to the state where the company is located and in which the mandate is exercised.
However, the remuneration granted in the case of daily activities of management or technical characters are taxable pursuant to article 15 of the Convention.
Since Belgium has one of the highest tax rates in the world, the same for social security contributions, the possibility to tax a portion of the incomes of an individual in another country will irrefutably and always provide for major advantages for the taxpayer (and the company that employs him especially regarding the social security in the hands of the employer).
As the social security contributions will also be paid in the foreign country the advantages are thus not limited to taxes.
In a situation where an employee or a director works part of his job in Belgium and the other part abroad, we recommend putting a split salary structure into place.
This simply results from application of articles 15 or 16 of the Convention for the avoidance of double taxation.
Since the split salary is based on articles 15 or 16 of the OECD model, it will apply in any case where a tax resident of one country perceives incomes from a foreign country.
Belgium and Israel have both concluded several Conventions (respectively 100 and 50) with many countries which allow a self-employed, director or an employee to benefit from the system of split salary almost everywhere in the world.