C'ttee proposes clearer residence rules, taxing digital currency

Eran Yaacov

"Globes" has obtained the recommendations of the the Committee on Amendments to International Taxation.

Just a couple of weeks after the Economic Arrangements Law accompanying the state budget was passed without any dramatic taxation reforms, a proposal on changes in the rules on international taxation in Israel is being presented to Israel Tax Authority director Eran Yaacov. "Globes" has obtained the recommendations of the Committee on Amendments to International Taxation, which contain some dramatic measures. They set out clear definitions of residence in Israel for tax purposes, revive the Israel exit tax, which has so far hardly been collected, and expand the reporting requirement to digital currencies.

The recommendations require the Tax Authority director's approval, and will then go to the Knesset Finance Committee and the Knesset plenum. The path to legislation of the recommendations seems clear, however, since most of the potential opponents to the reform took part in formulating it, in the team headed by Ronald Am-Shalem, VP for professional affairs in the Israel Tax Authority, on which all the relevant professional bodies, the Israel Bar Association, the Institute of Certified Public Accountants in Israel, and the Israel Tax Advisers Association, were represented.

In recent years, the Israel Tax Authority has done battle with dozens of Israelis who have lived abroad for a period of time and have not reported their overseas incomes on the grounds that they are not residents of Israel. The most famous case is that of model Bar Refaeli, who was convicted, along with her mother Tzipi Refaeli, of a series of tax offences, among them concealment of overseas income. Another prominent case is that of poker player Rafi Amit, who paid tax as an Israeli resident despite spending most of his time abroad.

It is not just the wealthy and famous who find themselves in dispute with the Tax Authority over the question whether they have left Israel or are still Israeli residents. It's a question that is relevant to tens of thousands of Israelis who choose to travel overseas to work for a period, which could be a few months or several years. If they come within the definition of Israeli resident, they are liable to tax in Israel on income from anywhere in the world, but if they are overseas residents, they are liable only on income arising in Israel.

The committee proposes to settle this disputed matter by relying on indisputable numbers. The recommendation is that the main test of residence should be the number of days spent in Israel or overseas. Anyone who spends 183 days or more a year in Israel for two successive years will be considered a resident of Israel, even if he or she has a permanent home and a family overseas. Conversely, anyone who spends less than 30 days a year in Israel for four successive years will be considered an overseas resident, even if he or she has a permanent home and a family in Israel.

The "center of life" test, which determines whether a person is an Israeli or overseas resident through examination of the person's association with Israel, such as a permanent home, where their family is, location of assets, and so forth, will give way to the test of the number of days, which cannot be denied.

"The amendment will narrow the area of dispute with the Tax Authority, and will create certainty for taxpayers who no longer wish to be considered residents of Israel, and allow orderly forward planning of exits from and returns to Israel," explains Adv. Tal Atsmon, Deputy Managing Partner and Co-Head of the Tax Department at Goldfarb Seligman, who was one of the representatives of the Israel Bar Association on the committee that drafted the reform. "Uncertainty is not good for anyone, not for the public and not for the Tax Authority. Under the recommendations, you simply count days, and that's it. We're switching to a simple, easy examination of how many days you spend in Israel in a year, and that determines residence, irrespective of where your wife or husband and children live, or where your bank account is, and whether you pay National Insurance contributions in Israel or maintain a business here."

There is however a presumption that if one member of a couple remains in Israel and the other goes overseas but spends at least 100 days a year in Israel, then the person who went overseas is an Israeli resident. And what happens if the visits to Israel total between 30 and 99 days? In such cases, the "center of life" test will come back into play.

Exit Tax revived

Not many people know it, but there is a provision in Israeli law that imposes an exit tax on anyone who ceases to be an Israeli resident. It is designed to tax profits on an asset that was not realized before the person left Israel. In practice, the tax is not currently collected, since in many cases the people concerned do not report that they are leaving Israel, and certainly do not later report the sale of assets acquired when they lived in Israel.

The committee recommends closing this loophole through a reporting requirement to the Tax Authority for people leaving Israel; mandatory payments at the time of leaving and annual tax returns until the assets are actually sold. The former Israeli can choose to pay the tax in full on leaving the country, or to defer payment.

If the value of the assets of the person leaving (excluding land in Israel) is less than NIS 3 million, the old law will apply, and payment can be deferred until the sale of the assets, and annual reports will be filed so that the Tax Authority will not miss the eventual sale. If, however, the value of the assets is equal to or greater than NIS 3 million, the tax on marketable securities will be paid immediately in full, while for other assets deferral will be allowed until their actual sale. In many cases the person will be required to deposit a guarantee, or to transfer the asset to a trustee to secure the payment.

Emigration from Israel must be reported within 90 days of the leaving date. A person who returns to Israel within five years of that date will be refunded the tax paid. "The case that most annoys the Tax Authority is that of startup entrepreneurs who go abroad when their company is worth $100 million, and after a few years make a $4 billion exit overseas, and don't pay a shekel in tax on it in Israel," says Adv. Atsmon. "The Tax Authority can't chase after them. The reporting requirement solves the problem. As a Zionist Israeli, I have no wish to allow people who leave Israel for good not to pay taxes in Israel. I think that the exit tax is justified, and it's fine that we act to make these people pay the taxes they ought to pay in Israel, and not pay in the UK, the US, or anywhere else, what is due to us.

"In the committee's report, we proposed that in cases of companies sold in tax havens, if within four years you sell a company offshore, you will pay not only exit tax, but also 25% capital gains tax, as though you had remained an Israeli citizen and had not broken off residence at all."

Digital currency

One of the most significant chapters of the committee's report on reform of international taxation is the one that expands the obligation to report to the Tax Authority. The committee recommends considerably extending the reporting requirement for Israeli residents in order to catch tax evasion that currently takes place under the radar, among other things the requirement to report assets held outside Israel.

The committee recommends lowering the amount that triggers the requirement to report assets outside Israel from NIS 1.8 million to NIS 1 million. To this recommendation it adds a dramatic half-sentence that reads: "including decentralized means of payment." These few words will in fact oblige anyone holding digital currency worth NIS 1 million or more to report it to the Tax Authority. The Tax Authority tried to insert into the Economic Arrangements Law a reporting requirement for any holding of virtual currency of over NIS 200,000, but that clause fell by the wayside early on in the discussions on the bill. The Economic Arrangements Law actually states that the clause that was omitted could have added NIS 30 million to state revenues in 2022 alone, and that the sum would probably grow from year to year.

It is not just a matter of virtual currencies. Reporting requirements have been expanded for change of residence of companies, gifts from overseas worth over NIS 500,000, and companies resident overseas. The new requirements partly stem from the various recent leaks, such as the Panama Papers, the Pandora Papers, and others, revealing controlling shareholdings held by Israelis in offshore companies that went unreported in Israel.

Published by Globes, Israel business news - en.globes.co.il - on November 17, 2021.

© Copyright of Globes Publisher Itonut (1983) Ltd., 2021.

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