What are the tax implications for somebody working overseas throughout lockdown?

I run a venture capital fund with my business partner and we have a small team usually based in the UK. During recent lockdowns, a member of the team has been working remotely from Israel, which we didn’t have an issue with as it hasn’t impacted their work. However, we now understand there may be tax ramifications. Is this true, and if so, what steps should we take?

Charlotte Hobrough, senior manager at accountancy and business advisory firm BDO, says remote working overseas can result in obligations for both an employer and an employee.

You, as the employer, could be responsible for paying income tax in Israel on behalf of your employee. Your employee might also need to file an income tax return in Israel.

Charlotte Hobrough, senior manager at BDO

If your employee spends less than 183 days in Israel during the Israeli tax year (from January 1 to December 31); continues to be paid by the UK fund; and the individual’s presence in Israel does not create a permanent establishment such as a fixed address for the fund, then no Israeli income tax or tax return filing should be required. This is assuming your employee is UK tax resident and not considered resident under Israeli domestic tax law.

If they exceed 183 days they will trigger an income tax liability on their earnings. Under Israeli tax law this could mean income tax is payable by your business and a payroll would need to be established in Israel. Past legal cases indicate that this will not apply to a foreign employer who has no local Israeli activity, in which case your employee would simply pay their tax liability by filing an Israeli tax return.

However, if the individual’s activities generate a permanent establishment in Israel then income tax, as well as corporate tax registration, will be required. These activities could include an employee working from a fixed place of business (including a home office) and an employee who has authority to substantially negotiate contracts for their employer. This is a complex area of tax and requires detailed analysis, so seeking independent professional advice should be considered.

Your employee can continue to pay UK national insurance contributions and be exempt from Israeli social security for up to two years under a UK-Israeli agreement, providing the individual does not decide to remain in Israel permanently. They may also be exempt from tax in Israel on foreign source income for the first year under a tax relief provided for returners or new immigrants following 10 years of foreign residency. 

Besides the tax implications, you will also need to consider your employer obligations under Israel’s labour laws with respect to pension, minimum wage, holiday entitlement and healthcare. Regulatory and data protection issues, as well as whether the employee has a right to work in Israel will also need to be considered.

Should I seek a pre-nup?

I’m getting married for the second time. Should I protect my children’s inheritance with a pre-nup?

Charles Hale QC, barrister at 4PB, says, in a word, yes. Pre-nuptial agreements or “pre-nups” are increasingly commonplace, especially on a second marriage, and can be a sensible way to protect children’s inheritance if done properly. Even in marriages with smaller assets they can be an important way of deciding what should happen financially if the marriage ends.

Charles Hale, barrister at 4PB

I am often asked to advise on whether or not prenuptial agreements are enforceable. The answer is, probably.

The UK Supreme Court confirmed in 2010 in Radmacher vs Granatino that a prenuptial agreement freely entered into by each party should be upheld, unless it would not be fair to hold the parties to their agreement.

This depends largely on the circumstances in which it was drafted and signed, and provided the agreed division of assets meets the future needs of both spouses. If a spouse wants to challenge it, the burden will be upon them to say why it’s not fair.

Both parties should take independent legal advice before signing. This should be done well in advance of the wedding. Signing a pre-nup on the morning — yes, it does happen — is not to be advised, as a court will want to be confident that both parties entered the agreement willingly.

The agreement can cover either the entire asset base or a specific asset, for example an inherited family art collection, but the parties should make sure to hold their assets consistently with the terms of the pre-nup. Usually that means in their own names for separate property that will not be later divided, or in joint names for assets that are likely to be divided.

That said, if you are intending to have children with your new spouse, you should consider including conditional clauses to provide for their needs when they arrive, or a formal review of the pre-nup triggered by the birth of each new child. The terms can be altered by agreement.

On a second marriage, your new spouse may acquire legal rights of inheritance in relation to assets held in your name, and so where a prenuptial agreement forms one side of the coin, a carefully drafted will should be on the other. It may not be romantic, but these agreements can vastly reduce costly proceedings down the line.

The opinions in this column are intended for general information purposes only and should not be used as a substitute for professional advice. The Financial Times Ltd and the authors are not responsible for any direct or indirect result arising from any reliance placed on replies, including any loss, and exclude liability to the full extent.

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