This was a capital gains tax case that hinged on the residency of the taxpayer.
Background
The taxpayer was born in the US in 1961 and immigrated to Israel in 1973 with his family. In 1990, he left Israel to study in the US but stayed on to work in various US hi-tech firms. He married an Israeli girl he met in the US in 1993 and they lived in San Francisco. In 1999, she decided to live in Israel, where they eventually had children, but he decided to continue living and working intensively in the US. They were largely estranged but he returned to Israel for Jewish festivals, birthdays and occasional business reasons.
In 2006, he was recruited to lead Wix, an Israeli hi-tech firm, and bought shares in Wix. In 2011 and 2014, he sold the shares at a gain of around NIS 10.5 million.
The issue
The taxpayer claimed he resumed Israeli residency as a “senior returning resident” in 2009. As he acquired the Wix shares in 2006, he invoked a clause in the Israeli tax law (ITO Sec. 97(b)(3)) exempting him from Israeli capital gains tax thereon. The ITA said no such exemption applied claiming he resumed Israeli residency in 2002.
Who an Israeli resident?
In general, an individual becomes resident for Israeli tax purposes if their center of living is in Israel, having regard to their overall circumstances – family, economic and social links, including: permanent home, home of that person and of their family, regular or fixed place of activity, place of active and substantial economic interests, place of activity in organizations, associations and institutions. There is a rebuttable presumption of residency if the individual spends at least 183 days in Israel in any tax year (calendar year) or 425 days over three years with at least 30 of those days in the latest year.
In this case, the taxpayer exceeded the 183/425 day thresholds in 2002, 2006 and 2009. On average, the taxpayer made 12 trips to Israel per year lasting an average of 12 days each.
But the center of living is what matters.
Insufficient homework
The ITA classified the taxpayer as Israeli resident because of two indicators of an Israeli center of living: the number of days in Israel each year and the fact that the wife and children lived in Israel
However, the court said critically, “When reviewing ‘overall circumstances’ you can’t just find an indicator, stop and say here is an indicator so I don’t need to continue reviewing the other indicators.... that does not seem to be the correct approach.”
In particular, the court found it “notable” that the ITA was unaware of all the taxpayer’s assets and had not looked deeply enough to attach any importance to his US activities and assets, even though the taxpayer had filed much documentation when responding to an ITA residency questionnaire (Paras. 57 & 58).
Main facts
The taxpayer’s wife testified that she alone raised the children. “He wasn’t there, he just wasn’t.” She also waived joint ownership of the San Francisco property. The taxpayer’s permanent homes were in San Francisco and Texas. He had another permanent home available to him in Tel Aviv, but it wasn’t really a home because he had no clothing or other personal possessions there. He lived out of a suitcase. His business activities, property and securities were mainly in the US. He used US credit cards outside Israel. He had Israeli and US cellphones and driver’s licenses. The court noted he was born in the US, moved to Israel in his teens and moved back at age 30. As a US citizen, he filed US tax returns and would be paying US tax on the capital gains in question.
Turning point
As always, consult experienced tax advisers in each country at an early stage in specific cases.
The writer is a certified public accountant and tax specialist at Harris Horoviz Consulting & Tax Ltd. leon@h2cat.com