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Dealing with the intricate landscape of tax law requires a blend of expertise, experience, creativity and strategic thinking. Tax Lawyer Doron Levy, a senior partner at Amit, Pollak, Matalon & Co., exemplifies these qualities. As the head of the firm’s Tax and Class Action practices, Adv. Levy is widely regarded as one of Israel’s leading tax experts. With over 30 years of experience, he has guided clients through a myriad of economic and fiscal challenges, specializing in both Israeli and international taxation.
From corporate taxation to complex real estate transactions, Adv. Levy’s proficiency spans a broad spectrum of tax-related matters. His deep understanding of direct and indirect taxes and his expertise in tax planning based on international laws make him a sought-after advisor in the field. He has a distinguished track record of negotiating with tax authorities and representing clients in court, further solidifying his reputation as a formidable advocate in tax-related disputes.
In this interview, Adv. Levy illuminates the crucial concept of residency in tax law, exploring its implications for individuals and corporations. He delves into the differences between the territorial and personal methods of taxation, explains the criteria for determining residency in various jurisdictions, and discusses the challenges taxpayers face in an increasingly globalized world. With his extensive knowledge and practical insights, Adv. Levy offers valuable guidance for navigating the complexities of international taxation.
Can you explain the significance of residency in the context of Israeli and international taxation?
"Residency is a crucial concept in tax law, especially considering the different methods countries use to tax international activities. Generally, there are two primary methods: the territorial method and the personal method".
Can you elaborate on the differences between these two methods?
"Certainly. The territorial method focuses on the relationship between the income and the country. If income is generated within a country's borders, or received within its borders, that country has the right to tax it. This approach is straightforward because it ties tax liability to the physical location where the income is produced or received".
Tax lawyer Doron Levy added: "On the other hand, the personal method examines the relationship between the taxpayer and the country. This method taxes individuals or corporations based on their connections to the country, such as residency or citizenship, on a worldwide basis, regardless of where the income is generated. The underlying principle is that individuals or entities benefit from the public goods and services provided by the country and, therefore, should contribute to its tax revenue".
How is residency defined in the context of the personal method?
"Residency is typically defined through several possible personal affiliations: physical presence, place of residence, central place of life, center of economic and personal relationships. Physical presence involves spending significant time in a country, often quantified as more than half the year. place of residence refers to the place an individual considers their permanent home.
Only in one case of the USA tax is levied in respect of Citizenship. Citizenship is a legal status that doesn’t depend on physical presence. Residence is a hybrid concept, combining physical presence and legal status".
"Most countries that use personal methods, including Israel, primarily rely on residency", Adv. Levy explained. "They define it based on physical presence, weighing specific facts and circumstances. For legal entities, residency is often determined by the place of incorporation or where the entity is managed and controlled".
Center of life test / Photo: Canva
How does Israel handle the concept of residency in its tax system?
"Israel has undergone significant tax reforms, particularly Amendment No. 132, which came into effect in 2003. This reform marked a shift from a primarily territorial tax system to one that incorporates personal elements. Before the reform, Israel’s tax regime was essentially territorial, focusing on whether income was generated or received within its geographical boundaries".
"However, some personal aspects were already present. For instance, certain incomes were deemed to have been generated in Israel under specific conditions, even if they technically weren't. Similarly, residents' capital gains were taxed on a personal basis, even if the gains were accrued abroad. The reform introduced a more substantial focus on personal connections, notably residency. This change means that individuals' and entities' tax liability is now more closely tied to their residency status".
Can you discuss how residency is determined for individuals and entities in Israel post-reform?
"Sure. The reform maintained a distinction between individuals and legal entities regarding residency definitions. For individuals, residency is determined by two main tests: the "183 days test" and the "center of life test". The "183 days test" is straightforward - if an individual spends 183 days or more in Israel during a tax year, they are presumed to be considered a resident. The "center of life test" is more complex, involving a comprehensive examination of various factors, such as family location, economic interests, place of a permanent home, and habitual abode. This test aims to determine where an individual's primary and permanent connections lie".
As tax lawyer Doron Levy explains, residency is determined by the place of incorporation or the place where management and control are exercised. The reform did not radically change the essential standards for these tests but provided more precise definitions and incorporated previously accepted judicial standards into the statutory framework.
How does Israel's approach to residency compare to other countries?
"Israel's approach is entirely consistent with global practices. Many countries adopt residency as the primary personal connection for tax purposes. However, some countries, like the United States, use citizenship as a significant factor. This means U.S. citizens are taxed on their worldwide income regardless of where they live or generate their income. In contrast, most countries, including Israel, focus on residency, which can lead to different tax implications for individuals and entities moving across borders. Israel’s hybrid system, incorporating territorial and personal elements, reflects a balanced approach, ensuring that residents contribute to the national tax revenue while maintaining competitiveness in the global economy".
What challenges do taxpayers face regarding residency and international taxation?
"The primary challenge is navigating different countries' complex and sometimes conflicting residency rules. For instance, an individual might be considered a resident in multiple jurisdictions, leading to potential double taxation. This is where tax planning and understanding double taxation treaties become crucial. Taxpayers must also be aware of the implications of changing residency status, such as moving abroad or returning to Israel. These changes can trigger significant tax consequences, including "exit taxes" or changes in the tax treatment of certain incomes".
How can taxpayers effectively manage these challenges?
Effective tax planning and seeking professional advice are key. Taxpayers should work with experienced tax advisors to understand their residency status and its implications. Advisors can help navigate the complexities of international tax laws, utilize tax treaties, and optimize tax liabilities. Moreover, maintaining thorough documentation and staying informed about changes in tax regulations are essential. This proactive approach ensures compliance and minimizes the risk of unexpected tax liabilities".