On November 21, the Israeli Tax Authority published a report proposing to reform international taxation rules (www.gov.il/he/departments/news/sa211121-1).
Unfortunately, the proposals mainly involve bureaucratic form-filling, looking for tax planning.
Moreover, the proposals miss the big money by ignoring the OECD’s recent (2020/21) twin pillar tax package aimed at larger multinationals.
The Israel Tax Authority claims the Israeli CPA Institute and the Law Society endorsed the proposals. In fact, the report represents a shotgun wedding after worse proposals were dropped.
It remains to be seen what will be legislated and when.
We briefly review some personal proposed measures below. Additional articles will follow.
Currently, an individual is considered fiscally resident in Israel if their “center of living” is in Israel. A rebuttable assumption of residency exists after 183 days presence in Israel in one tax year (ending December 31), or 425 days over three tax years including at least 30 days in the last year.
It is proposed to introduce “decisive” presumptions of Israeli residency, subject to the center of living test” (i.e. not decisive) as follows:
- Present in Israel at least 183 days in one or two tax years.
- Present at least 450 days over three tax years including at least 100 days in the last year, unless they spent at least 183 days any year in a country that has a tax treaty with Israel.
- Present in Israel at least 100 days in a tax year if their spouse shares a common household and is Israeli resident.
It is also proposed to have decisive tests of foreign residency as follows:
- Present in Israel under 30 days per year for four tax years – from the first tax year.
- Present in Israel under 30 days per year for three tax years – from the second tax year.
- Both the above are provided the individual is present in Israel no more than 15 days in January or December.
- The individual and their spouse are present in Israel under 60 days per year for four tax years – from the first tax year.
- The individual and their spouse are present in Israel under 60 days per year for three tax years – from the second tax year.
- Both the above are provided the individual is present in Israel no more than 60 days in January-February or November-December.
- The individual and their spouse are present in Israel under 100 days per year and in a treaty country at least 183 days for four tax years – from the first tax year.
- The individual and their spouse are present in Israel under 100 days per year and in a treaty country at least 183 days for three tax years – from the second tax year.
- Both the above are provided the individual is present in Israel no more than 50 days in the first or last 100 days of the year (Comment: why the longer period in a treaty country?).
It is proposed that immigrants should start disclosing exempt foreign income derived during their 10-year tax holiday. Another committee may re-review whether the tax exemption should continue. The ITA claims to have statistics showing the 10-year tax holiday didn’t increase immigration. (Page 60. Comment: Presumably this followed the end of the Soviet influx in the 1990s.)
Another committee will consider trusts.
The ITA is frustrated that Israelis who stop residing in Israel rarely pay “exit tax” (really capital gains tax) due upon departure or upon realizing the assets concerned.
So the report proposes extra requirements if the tax is not paid upon departure including: filing lists of assets at cost and at fair market value upon departure and annually, taxing dividends annually from foreign companies, leaving a guarantee for the tax or an asset lien and/or paying tax on account within 90 days after departure, forfeiting the pre-immigration Israeli securities exemption.
Since it may take three to four years to know if you established foreign residency (see above), these requirements would also apply if you are gone from Israel 183 days in a tax year.
To reduce double taxation when selling an asset, the law already restricts the Israeli tax to the pro-rata portion of time they owned the asset as Israeli residents. It is proposed to change that for employee shares and share options to the pro-rata portion of the vesting period in Israel (which may cause double taxation after all).
As always, consult experienced tax advisers in each country at an early stage in specific cases. [email protected] The writer is a certified public accountant and tax specialist at Harris Horoviz Consulting & Tax Ltd.