YOUR TAXES: Who might be resident?

Effect of tax treaties Tax treaties override the domestic Israeli law on matters of principle like residency, but can’t make the new reporting requirement go away.

Shekel money bills (photo credit: REUTERS)
Shekel money bills
(photo credit: REUTERS)
One of the irritating things about the Israeli Tax Authority (ITA), is that they cannot make up their mind who is a resident, for Israeli tax purposes.
Now to keep us all guessing, the Knesset has just passed an amendment that requires disclosure and tax returns from people in a borderline situation. (Amendment 223 to the Income Tax Ordinance, Book of Laws 2548 of April 7, 2016).
The residency rules
For Israeli tax purposes, an Israeli resident individual is defined as an individual whose center of living is in Israel, taking into account the person’s family, economic and social links.
A presumption of Israeli residency, which may be rebutted by the taxpayer or the ITA, in either of the following circumstances: (1) the individual is present in Israel at least 183 days in a tax year ending 31 December, or (2) the individual is present in Israel at least 30 days in the current tax year, and 425 days cumulatively in the current and two preceding tax years.
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 certain official bodies.
Since the center of living test is subjective, the ITA has published additional objective criteria (Circular 1/2011).
These criteria deem Israeli fiscal residency to start at the earliest of the following times: the date stamped on the certificate issued by the Ministry of Absorption; the date the individual started living in a permanent home in Israel (assuming he does not have a “family” (for example: a spouse and children under the age of eighteen); the date any member of his family started living in a permanent home in Israel (in cases where he has a family).
And various case law decisions treat the number-of-day tests to be objective, whereas the other circumstantial tests to be subjective.
What does the amendment say?
If an individual appears to be resident in Israel according to one of the objective number-of-days tests, but claims to be non-resident based on the circumstantial subjective test, that individual must file a tax return and stating the facts supporting this claim.
This will apply for the 2016 tax year onwards. The ITA will then know who to home in on in order to review their claim to be non-resident. Until now, such cases were not reportable which was good for the taxpayer, galling for the ITA.
The amendment won’t apply to the spouse or children of such an individual or foreign workers who are not Israeli citizens or residents. No change will apply to employees of official bodies – the State of Israel, local authorities, state-owned companies, the Jewish Agency, JNF or JIA.
Effect of tax treaties
Tax treaties override the domestic Israeli law on matters of principle like residency, but can’t make the new reporting requirement go away.
Tax treaties contain “tie breaker” provision,. The main tie breakers are typically the place of the permanent home, or if that is inconclusive, the center of vital interests.
Israel has tax treaties with over 50 countries, but under 50% of all the countries in the world. Visitors from a non-treaty country may face a tougher time establishing their residency, unless they are foreign workers.
New residents and senior returning residents (who lived abroad at least 10 years) will be treated like foreign residents – no Israeli tax on foreign income and gains for 10 years. For them, the amendment should be academic for 10 years.
Israeli expats abroad
Israeli residents who relocate abroad may face a tough time proving they are no longer Israeli residents. The law requires them to be abroad over 183 days for two years and to establish a center of living abroad for two more years.
Therefore, they must now beware of the 183/425 day tests in the third and fourth years. Tax treaties may help accelerate the process, unless they want to be non-resident expats in the other country.
Comments The ITA cannot seem to decide which test of residency it prefers – the objective number-of-days test or the subjective test based on all circumstances. But the focus is now mainly on the objective test.
[email protected] The writer is a certified public accountant and tax specialist at Harris Consulting & Tax Ltd.
As always, consult experienced tax advisors in each country at an early stage in specific cases.