The distinction between an individual as an Israeli resident or a foreign resident holds immense importance, as it dictates their tax obligations. An Israeli resident is required to report and pay income tax on all income generated and derived within Israel and abroad, whereas a foreign resident is only obligated to report and tax income generated or derived only within Israel.
To address the ongoing disputes between taxpayers and the Taxing Authority concerning the definition of an Israeli resident, a new legislative proposal has been recently published.
On July 24, 2023, a memorandum of the proposed legislation was released, intending to amend the Income Tax Ordinance (Place of Residence of an Individual), 5723-2023. This proposal is based on the recommendations from the Committee for the Reform of International Taxation, whose report was submitted to Mr. Eran Yaakov, the head of the Taxing Authority, in November 2021.
The current Ordinance employs two quantitative presumptions to determine the residency status of individuals:
If an individual spends 183 days or more in a particular tax year in Israel, or stays in Israel for 30 days or more during that tax year, they are considered Israeli residents if, in combination with the previous two years, their total stay in Israel adds up to 425 days or more.
However, both the individual and the assessing officer can challenge these quantitative presumptions by utilizing the “Center of Life” test’s qualitative criteria. The “Center of Life” test assesses an individual’s connections to Israel through various criteria, including the location of their permanent home, their place of residence, their family members’ residence, their place of primary occupation or place of employment, and the center of their economic interests.
Courts have ruled that the “Center of Life” test for determining residency status should be assessed from both an objective and subjective perspective. Additionally, they have introduced several subtests to consider, which can significantly impact the outcome of residency-related questions. Due to the complexity of the Ordinance’s definition, this issue often leads to disputes brought before the Taxing Authority and Israeli courts and has become a fertile ground for various tax opinions and positions.
The proposed amendment to the law, outlined in the memorandum, introduces irrebuttable presumptions that will establish an individual’s residency status without the need to thoroughly examine all their family, economic, and social ties. The decisive factor will be the number of days the individual spends in Israel during the tax year. Specifically, an individual will be considered an Israeli resident if they meet one of the following conditions:
The memorandum introduces clear and irrebuttable presumptions for defining the term “foreign resident.” According to these presumptions:
Furthermore, if an individual and their spouse have resided in a country with which Israel has a double tax treaty, and they provide a residency certificate, they will be considered non-residents from the first year if they spent 100 days or less in Israel per year, and they resided in the treaty country for four consecutive tax years. Alternatively, they will be considered non-residents from the second year if they spent 100 days or less in Israel per year, and they resided in a treaty country for three tax years.
It’s important to note that in all the cases mentioned above, the presumption of being a foreign resident will not apply if the period of stay in Israel was at the beginning or end of the relevant period.
According to the Tax Authority and the Ministry of Finance, the proposed amendment aims to bring greater certainty in determining residency for tax purposes, reduce conflicts between the Tax Authority and taxpayers along with their representatives, and mitigate potential revenue losses resulting from tax planning strategies.
In practice, the proposed amendment to the law addresses cases where there was initially no doubt about an individual’s residency status. However, it’s essential to note that the existing quantitative presumptions will still apply, and the center of life test will continue to carry significant weight. This means that individuals can still take positions based on the qualitative criteria.
Moreover, as Israel is a party to numerous double taxation treaties, the provisions of these treaties will take precedence over the internal law, including the irrebuttable presumptions. This could lead to greater uncertainty and potential tax burdens for individuals if there is no agreement between the two countries on the application of residency rules.
Considering the complexity and potential clumsiness of the amendment’s provisions, it is uncertain whether it will effectively achieve the desired certainty for taxpayers, representatives, and the Tax Authority, as claimed.
It’s important to note that the amendment is still subject to legislative procedures before being incorporated into the law. However, taxpayers are advised to be prepared in case the amendment is passed, and they should be aware of the Taxing Authority’s approach in specific cases outlined in the memorandum.
For any further clarification on this matter, we the Tax Department at Raveh Ravid & Co. are at your service.