While the country is in turmoil over legislation of the government’s judicial reform plans, Finance Minister Bezalel Smotrich published for public comment a bill that fundamentally changes the formulas for determining who is a resident of Israel for tax purposes.
This is the first part of a fundamental overhaul of international tax rules, first published by Globes in November 2019. The proposals set out clear rules for defining a resident of Israel for tax purposes, breathe life into the hitherto uncollected “exit tax from Israel,” and expand the requirement to report the Israel Tax Authority to cryptocurrencies.
The bill now published concerns only the issue of residency, but it represents a significant change that could affect any Israeli moving abroad or leaving the country for a certain period.
The bill sets out categorical, irrefutable assumptions, whereby whether an individual is a resident of Israel or a resident abroad is determined mainly on the basis of the number of days spent in Israel during the tax year, without the need to examine the individual’s family, economic and social relationships.
According to the IRS and the Ministry of Finance, the legislation will mean greater certainty in determining residence for tax purposes, will reduce friction between the IRS and taxpayers and their representatives, and reduce damage to state revenue from tax planning.
The main test: the days spent in Israel
Today, an individual is considered to be a resident of Israel if the center of his or her life is in Israel. In determining a person’s life center, various qualitative characteristics are examined, such as the location of the person’s permanent home, where the person and his family live, the usual place of work, and the center of the person’s economic interests.
In addition to these qualitative criteria, there are quantitative criteria relating to the number of days a person spends in Israel during each tax year. However, the determination according to the number of days spent in the country can be refuted on the basis of qualitative criteria that determine the center of a person’s life.
The new legislation proposes settling one of the main sources of disagreements with the IRS by relying on unquestioned numbers.
When an individual or their life partner spends several days in Israel over a period of several years, the individual is considered to be resident in Israel. If they spend very few days in Israel over a period of years, the individual is considered to be a resident abroad. In cases that fall between these categorical assumptions, the existing law will continue to apply.
Under the bill, the main test for residency will be the number of days one spends in Israel or abroad. For example, a person who spends 183 days or more in Israel in each of two consecutive tax years will be considered an Israeli resident, even if he owns a permanent home abroad and his family lives abroad. Conversely, a person who spends less than 30 days in Israel in each of the four consecutive tax years is considered to be resident abroad, even if he has a permanent home and family in Israel.
The Center of Life test will cede center stage to the number of days test, based on irrefutable facts.
The bill is a product of the recommendations of the International Tax Reform Committee formed at the initiative of Israel Tax Authority director Eran Yaacov, whose term is due to expire in September (after two extensions due to delays in appointing a replacement). The committee was chaired by Roland Am Shalem, senior deputy director at the Tax Authority, and included representatives from the Tax Authority and the Ministry of Finance in the State Revenue Administration, the Israel Bar Association, the Institute of Certified Public Accountants of Israel, and the Institute of Tax Advisers of Israel.
The current bill is the first to be posted for public comment based on the committee’s recommendations. More bills implementing the recommendations are expected to be published in the coming weeks.
Legal battles
In recent years, the Israel Tax Authority has waged legal battles with dozens of Israelis who left Israel or lived abroad for periods of time and did not report their entry, on the grounds that they were not residents of Israel.
The most famous case was that of model Bar Refaeli, who, along with her mother, Tzipi Refaeli, was convicted of a series of tax offenses, one of which was concealing her foreign income. Another case that made headlines was that of poker player Rafi Amit, who paid tax as a resident of Israel despite the fact that he spent most of his time abroad.
But disputes with the IRS over tax residency aren’t just for the rich and famous. This issue is relevant for the tens of thousands of Israelis who go abroad to work for fixed periods, from a few months to several years.
Under the new definitions, if those leaving Israel are defined as Israeli residents, they will have an obligation to pay tax in Israel on income generated anywhere in the world. If they fall under the definition of a resident abroad, their tax liability will be on income arising in Israel only.
While tax experts welcome the desire to create certainty in the definition of tax residency, some argue that the new definition is extremely unfavorable to those who leave the country.
“The bill that has been published represents only one element among many changes recommended by the Tax Reform Committee,” says Igal Roffe, partner and head of taxation at Fahn Kanne & Co Grant Thornton Israel. “It seems no coincidence that they began with the recommendations that embody the extreme positions of the Israeli tax authority regarding an individual’s residency.”
Rove says the legislation will mean clarity in defining residency, because it makes categorical assumptions. “Nevertheless, the assumptions specify, among them, for example, that a person who has spent 100 or more days in Israel and his life partner will both be considered residents of Israel, and naturally tend in favor of the IRS, and not by chance.”
Published by Globes, Israel business news – en.globes.co.il – on July 24, 2023.
© Copyright Globes Publisher Itonut (1983) Ltd., 2023.
