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Israeli Residency and Taxation

In January 2003, the State of Israel introduced a reform on its taxation system
. Since its implementation, Israel has based its taxation system on personal affinity as opposed to basing taxation on territorial affinity. This reform in Israeli taxation laws has resulted in many Israeli individuals and companies becoming subject to Israeli taxes based on Israeli residency. The Israeli market features a large percentage of companies and individuals who are incorporated with foreign companies with sources of income overseas. The implementation of this reform has raised many issues regarding Israeli residency and taxation, particularly factors determining Israeli residency for tax purposes. This article will discuss the criteria which determine Israeli residency for individuals and companies according to Israeli law.

Israeli residency and taxation - Company residency

The Israeli income tax directive specifies two main tests for determining Israeli residency of a company. The first test is the location of company incorporation. The Israeli law directive states that if a company was incorporated in Israel, the company is considered to be an Israeli resident company, even if it operates and derives income overseas. The second test is the location of company control and management. When examining company control and management, many factors are taken into consideration, such as: geographic location of strategic planning and decision making, location of implementing these decisions, etc. This test is used mainly to identify companies who operate in Israel, yet register abroad in order to avoid Israeli taxation. If a company meets one or both of these tests, it is considered an Israeli resident company for tax purposes.

Israeli residency and taxation - Individual residency

The tests determining individual residency focus on two factors: technical and affinity. The test which determines technical residency verifies how many days the individual spent in Israel during the last tax year. If the individual spent over 183 days over the past tax year in Israel, he/she is considered an Israeli resident. The second test considers the individual's linkage to Israel by examining several personal parameters. The Israeli tax directive determines whether Israel is at the center of the individual's life, in which case the individual would be considered an Israeli resident. The Israeli Income Tax Ordinance considers the following parameters when determining an individual's residency for tax purposes:

- Permanent residency location
- Residential status of an individual and his family members
- Location of his/her normal business activity or permanent employment
- Location of his/her "significant and active" economic interests
- Location of an individual's public activity with different public organizations

Double taxation

As a result of basing Israel's taxation method on personal affinity, many Israelis are liable to Israeli taxes in addition to local tax laws overseas. In order to minimize doble taxation
, Israel is a party to several tax treaties with many countries worldwide. The main raison d’être behind these treaties is to avoid double taxation by providing exclusive right for taxation for given activities to one of the treaty's parties only or, providing the taxpayer with the ability to enjoy credit against taxes paid in the country where the income was derived.

Israeli residency and taxation requirements should be considered while planning any Israel related activity. Israeli tax laws and criteria, which determine Israeli residency of companies and individuals, make tax consultation vital for many companies and individuals who operate in Israeli and overseas. A number of marginal decisions and actions can determine whether or not an individual or company will be subject to Israeli taxes.