While the country is in turmoil over legislation of the government’s judicial overhaul plans, Minister of Finance Bezalel Smotrich has published for public comment a draft bill that dramatically changes the formulae for determining who is a resident of Israel for tax purposes.
This is the first part of a substantial reform of the international taxation rules, first reported by "Globes" in November 2019. The proposals set out clear rules for the definition of a resident of Israel for tax purposes, breathe life into the "tax on exiting Israel", which up to now has hardly been collected, and expand the requirement to report to the Israel Tax Authority to digital currencies.
The draft bill now published relates only to the question of residency, but it represents a significant change that could affect any Israeli relocating overseas or leaving the country for a certain period.
The draft bill sets out conclusive presumptions, that cannot be rebutted, whereby it is determined whether an individual is a resident of Israel or an overseas resident chiefly on the basis of the number of days spent in Israel during a tax year, without the need to examine the individual’s family, economic, and social ties.
According to the Tax Authority and the Ministry of Finance, the legislation will mean greater certainty in determining residency for tax purposes, will reduce friction between the Tax Authority and taxpayers and their representatives, and reduce the harm to state revenues from tax planning.
Main test: Days spent in Israel
Today, an individual is considered a resident of Israel if their center of life is in Israel. In determining a person’s center of life, various qualitative characteristics are examined, such as the location of the person’s permanent home, where the person and his or her family live, the usual place of employment, and the center of the person’s economic interests.
Alongside these qualitative criteria are quantitative ones relating to the number of days spent in Israel during each tax year. The determination according to the number of days spent in the country can, however, be rebutted on the basis of the qualitative criteria establishing the person’s center of life.
The new legislation proposes to regularize one of the main sources of disputes with the Tax Authority by relying on undisputable numbers.
When an individual or their life partner spend many days in Israel over a number of years, the individual will be regarded as a resident of Israel. If they spend very few days in Israel over a period of years, the individual will be regarded as an overseas resident. In cases that fall between these conclusive presumptions, existing law will continue to apply.
Under the bill, the main test of residency will be the number of days spent in Israel or overseas. For example, someone who spends 183 days or more in Israel in each of two successive tax years will be considered an Israeli resident, even if he or she owns a permanent home overseas and his or her family lives overseas. Conversely, someone who spends fewer than 30 days in Israel in each of four successive tax years will be considered an overseas resident, even if they have a permanent home and a 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 the product of the recommendations of a committee on reform of international taxation formed on the initiative of Israel Tax Authority director Eran Yaacov, whose term is due to end this September (after two extensions because of delays in appointing a replacement). The committee was headed by Roland Am-Shalem, a senior deputy director at the Tax Authority, and it comprised representatives of the Tax Authority and of the Ministry of Finance State Revenues Administration, the Israel Bar Association, the Institute of Certified Public Accountants in Israel, and the Institute of Tax Consultants in Israel.
The current draft bill is the first to be published for public comment on the basis of the committee’s recommendations. Further draft bills implementing the recommendations are expected to be published in the coming weeks.
Legal battles
In recent years, the Israel Tax Authority has conducted legal battles with dozens of Israelis who left Israel or who lived overseas for periods of time and did not report their incomes, on the grounds that they were not Israeli residents.
The highest profile case was that of model Bar Refaeli, who, together with her mother Tzipi Refaeli was convicted of a series of tax offences, among them concealing her overseas income. Another case that made headlines was that of poker player Rafi Amit, who paid tax as an Israeli resident despite the fact that he spent most of his time overseas.
But disputes with the Tax Authority over tax residency are not just the preserve of the rich and famous. The issue is relevant to tens of thousands of Israelis who travel overseas to work for set periods, of a few months to several years.
Under the new definitions, if those leaving Israel are nevertheless defined as Israeli residents, they will have an obligation to pay tax in Israel on income arising anywhere in the world. If they fall within the definition of an overseas resident, their liability to tax 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 disadvantageous for those leaving the country.
"The draft bill that has been published represents just one element among many in the changes that the taxation reform committee recommended," says Yigal Rofe, partner and head of the Tax Department at Fahn Kanne & Co. Grant Thornton Israel. "It would appear that it’s no coincidence that they began with the recommendations that embody the most extreme positions of the Israel Tax Authority concerning the residency of an individual."
Rofe says that the legislation will mean clarity in the definition of residency, since it prescribes conclusive presumptions. "Nevertheless, the presumptions set, among them, for example, that a person who spent 100 or more days in Israel and their life partner will both be considered Israeli residents, naturally lean in favor of the Tax Authority, and not by chance."
According to Adv. Daniel Paserman (CPA), Head of Tax at Gornitzky & Co., "Establishing irrebuttable presumptions is a highly welcomed initiative, as it serves to create certainty and reduce friction between taxpayers and the tax authorities. At the same time, the proposed legislation does not eliminate the existing rebuttable presumptions, resulting in continued ambiguity and uncertainty in practice.
"Furthermore, the proposed irrebuttable presumptions are unbalanced, as they take a notably more stringent approach toward the number of days for classifying an individual as a 'resident of Israel' compared to the criteria for regarding someone as a 'foreign resident.' The provisions attempt to cover exceptional cases, and thus are inherently complex and challenging in their formulation. As such, it is advisable to simplify the proposed provisions and improve their formulation."
Published by Globes, Israel business news - en.globes.co.il - on July 24, 2023.
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