This week we witnessed in Israel two tax broadsides on the institution of
marriage. First, in guidance from the Israel Tax Authority (ITA) on starting or
stopping Israeli fiscal residency. Second, in a Supreme Court judgment on
couples working in the family business.
Starting or stopping Israeli
On January 29, the ITA issued a circular on “Determining the
date of ceasing to be Israeli resident and the date when a foreign resident
becomes Israeli resident.”
In general, the Income Tax Ordinance defines
an Israeli resident is as an individual whose “center of living” is in Israel,
taking into account the person’s family, economic and social links. A rebuttable
presumption of Israeli residency will apply in either of the following
circumstances: (1) the individual is present in Israel at least 183 days in a
tax year ending December 31; or (2) the individual is present in Israel at least
30 days in the current tax year and 425 days cumulative in the current and two
preceding tax years.
All this is rather vague. The law does list a few
extra factors to consider, such as: location of a 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 certain official bodies.
circular tries to clarify things by citing 11 examples of residency tax rulings
the ITA has issued. The circular is contradictory in places and reads like a
series of anecdotes. Nevertheless, among the things it seems we can glean are:
If the wife and children live in Israel and the husband visits them for 125 days
per year on average, he will be deemed Israeli resident, in order “not to
facilitate the split of the family unit.”
• But ex-wives need not trigger
Israeli fiscal residency.
• Also, hospitalization of a person in Israel
will not in itself trigger Israeli fiscal residence for that person (under
Israeli tax regulations). Nor will visits to Israel to care for other family
members in a hospital, according to the circular.
• If a person relocates
for at least three years with his wife to a country that has a tax treaty with
Israel, they may be treated as foreign residents in that period.
Israeli National Insurance Institute status is always a factor, but not always a
decisive factor.Couples working in the family business
tax-planning technique around the world is “income splitting” – put your wife
(or husband) on the family business payroll and let them receive a salary on
which they pay tax at their own marginal tax rate, not yours.
not work too well in Israel. In principle, Section 66 of the Income Tax
Ordinance allows separate tax calculations for husband and wife.
Section 66(d) only allows separate tax calculations “if the income of one spouse
comes from an income source that is independent of the income source of the
other spouse, and this is not the case if the income comes, among other things,
from: (1) a business or profession of the other spouse; (2) a company in which
the other spouse controls, directly or indirectly, a management right or 10
percent of the voting rights, unless... the recipient received such income at
least a year before their marriage or five years before the other spouse
acquired such rights; (3) a partnership in which the other spouse controls at
least 10% of the capital or rights to profit.”
Over the years, two out of
three earlier District Court cases ruled that separate tax calculations are
permissible if the taxpayer couple can prove the amount of income paid to each
is based on arm’slength considerations – in terms of the amount and the
necessity for the second spouse. However, the ITA appealed these
Consequently, in an omnibus decision covering all three cases,
(Malchieli, Shkori, Cohen, Civil Appeals 8114/09, 8297/09 and 1177/10, judgment
dated February 1, 2012), the Supreme Court ruled in favor of the ITA.
ruling said: “The clear language of the section does not leave room for any
interpretation that the independence requirement is a requirement capable of
rebuttal, even if there are weighty reasons for this.... Section 66(d) must be
interpreted as prescribing that in every case in which the income of a couple is
interdependent, a joint income calculation is needed, even if the amount of
income is not based on tax considerations. The legislature did not allow
taxpayers to dispel the absolute assumption prescribed in instances involving
interdependent incomes, for reasons of administrative efficiency at the ITA,
certainty, stability and consistency.”
The Supreme Court judgment
criticizes this situation, saying: “There is no need to add tax considerations
to the list of reasons weakening the family unit.
This so-called law does
not match the reality of our times and will in various cases lead to
discrimination against a married couple, by granting a tax benefit to an
After pointing out the tax efficiency of living in
sin, the Supreme Court concludes by saying: “Let us hope the legislature will
reconsider whether the drafting of Section 66(d) is still
Note that another subsection, Section 66(e) of the Income Tax
Ordinance, allows separate spousal tax calculations for income below NIS 48,960
(in 2012, approximately $13,000) earned over at least 36 hours per week for at
least 10 months in the year. The Supreme Court derides this amount as being
below the statutory minimum wage (currently NIS 4,100 per month for adults in
2012).To sum up
Unfortunately, marriage is not always tax
efficient. But it does have other redeeming qualities.As always,
consult experienced tax advisers in each country at an early stage in specific
Leon Harris is a certified public accountant and tax
specialist at Harris Consulting & Tax Ltd.
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