Recently, new regulations were issued that aim to clarify the key question "Who is a resident?" for Israeli tax purposes. We have discussed this question in the past in this column (January 18, 2006) and this question matters because a resident is subject to Israeli tax on worldwide income and capital gains. It is true a new or returning resident (after three years ongoing residence abroad) enjoys certain limited exemptions for five to 10 years, but a person who ceases to be a resident is subject to a much loathed "exit tax" (capital gains tax) on the value of his assets. It would have been nice to have a simple number-of-days-in Israel test of residency - what we have instead is a long set of arcane criteria that just got longer, as explained below. The 2003 tax reform laid down some basic criteria regarding who is a resident. Subject to any applicable tax treaty: Individuals will be resident if their center of living is in Israel, having regard to their overall personal, family economic and social circumstances. Individuals will generally be presumed resident if they are present in Israel 183 days or more in a tax year, or 30 days in a tax year and 425 days in Israel in a particular year plus the previous two years. A day includes a part of a day. These presumptions may be challenged by the taxpayer or the Tax Authority. Aside from the number of days' presence in Israel, the center of living criteria listed in the law are: location of permanent home; place of residence of the individual and his/her family; place where the individual regularly works or is employed; location of active and material economic interests; place where the individual is active in various organizations, associations or institutions; employment by official bodies, namely the State of Israel, a municipality, The Jewish Agency, Joint Israel Appeal/Jewish National Fund, State-owned company, official or statutory body. The new regulations published April 10 aim to amplify these general rules in a number of specific situations, as discussed below. An employee who relocates from Israel to work abroad for the State of Israel or other official bodies will be deemed to remain an Israeli resident indefinitely if "employment relations" began when he was an Israeli resident. An employee of other official bodies will be deemed to remain Israeli resident for five years after relocating to work abroad if employment relations began when he was an Israeli resident unless he can "prove otherwise" to the Israeli Tax Authority. Individuals who do not become new immigrants but relocate to Israel may avoid being deemed Israeli residents in certain cases. This applies to the following persons: - Diplomatic representatives or consulate officials on official full time duty for a foreign state as well as their spouse and children. - Soldiers of foreign armed forces or the UN. - Individuals who come to Israel to serve in the Israel Defense Force, until the end of their service, if they elect to remain non-resident (it remains to be seen who will think of filing a tax election while on active service. If they do, what is the procedure?). - Students studying at least half a course, during their first three years in Israel, if they elect to remain non-resident. - Teachers, lecturers or researchers living in Israel at a higher education institution or other teaching institution where they perform a function, during their first three years in Israel. - A priest performing a function at a religious institution in Israel at its request, during their first three years in Israel. - A patient hospitalized in a hospital or convalescence home who came to Israel to be hospitalized or fell ill while in Israel, if he would not otherwise be considered an Israeli resident. - Foreign journalists and sportsmen, during their first five years in Israel. These additional residency regulations are effective from January 1, 2006. Unfortunately, there are no transitional provisions to prevent hardship. For example, a foreign priest, university lecturer or university researcher who has been present in Israel for four years may well have become resident on January 1, 2006. If they up and leave Israel permanently, they may owe "exit tax." And if they travel extensively in and out of Israel, it may not always be clear when or if the three-year clock starts. Fortunately, Israel's tax treaties may on occasion override the above rules. In addition to the above tax provisions, the National Insurance Institute published a Circular on January 2, 2006 (5/2006) which seeks to clarify when a person stops being an Israeli resident. The basic premise is that if a person continues paying national insurance contributions while he is abroad, this fact signifies his intention to retain his connection with Israel and to retain his national insurance entitlement - at least in the first few years - so long as he doesn't apply to cease being an Israeli resident or stop paying national insurance contributions. Residency will stop at the end of the period of paid-up social security cover, but after no more than five years consecutive years. Or will it? The Circular goes on to say there may be cases where the individual proves he is a resident after five years absence from Israel and carries on paying national insurance contributions - for example, doctors and students. Personally, I don't know many students or others who have the money and the inclination to keep paying Israeli national insurance contributions while living abroad. And if they do so, will they also remain residents for income tax purposes? Anyone on the move to or from Israel should seek professional advice regarding their tax residency status and its implications. The author is an International Tax Partner at Ernst & Young Israel.