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Israeli Residency and Taxation

Israeli residency and taxation

In January of 2003, the state of Israel has introduced a reform in its taxation system. Since the implementation of this reform Israel has based its taxation system on personal affinity as opposed to basing taxation on territorial affinity. This reform in Israeli taxation laws has caused many Israeli individuals and companies to be subjected to paying Israeli taxes based on their Israeli residency. The Israeli market has a large percentage of companies and individuals who are incorporated with foreign companies and have sources of income abroad. The implementation of this reform has raised many issues concerning Israeli residency and taxation, particularly the factors which determine Israeli residency for tax purposes. This article will discuss criteria which determine the Israeli residency of individuals and companies by the Israeli law.

Israeli residency and taxation - Company residency

The Israeli income tax directive determines the Israeli residency of a company for tax purposes through two main tests. The first test is the location of the company's incorporation. The Israeli law directive states that if a company was incorporated in Israel, it's considered an Israeli resident company, even if it operates and derives income abroad. The second test is the location of the company's control and management. When examining the company's control and management, many factors are taken into consideration, such as: the 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

Similarly to the tests of company's Israeli residency, the tests which determine individual residency comprise of two aspects: the technical aspect and the affinity aspect. The test which determines technical residency checks how many days the individual spent in Israel during of the last tax year. If the individual spent over 183 days over the past tax year in Israel, he is considered an Israeli resident. The second test is much less technical than the first one. The second test considers the individual's linkage to Israel. By checking several personal parameters the Israeli tax directive determines whether Israel is the center of the individual's life, and therefore considered an Israeli resident.  Among parameters which are considered while determining an individual's residency for tax purposes, the Israeli Income Tax Ordinance includes the following:

- permanent home location; 
- place of living of an individual and his family members;
- location of his regular business activity or permanent employment;
- location of his "significant and active" economic interests;
- location of an individual's public activity in different public organizations.

Double taxation

As a result of basing Israel's taxation method on personal affinity, many Israelis have become subjected to Israeli taxes in addition to local tax laws abroad. In order to minimize the instances of double taxation, Israel is a party to several tax treaties with many countries over the world. The main concept which stands behind these treaties is to avoid double taxation by providing excusive right for taxation for certain 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 are something to be considered while planning any
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