The planned residency tax reform – a potential blow to hi-tech relocations

It seems the Israeli Tax Authority has become fed up with the Israeli tax residency tests under the current law.

Calculating taxes (photo credit: INGIMAGE)
Calculating taxes
(photo credit: INGIMAGE)
It seems the Israeli Tax Authority has become fed up with the Israeli tax residency tests under the current law. The law today stipulates that the material test to determine residency is based on the taxpayer’s “center of life” criteria, while the quantity test is set as a presumption that may be disputed by either the tax authorities or the taxpayer. By reviewing the cases handling tax appeals on residency issues, the uncertainty relating to the existing test was a leading force in increasing disputes between the tax authority and the taxpayers.
For this purpose, and in order to bring about certainty in determining whether a tax payer is considered an Israeli resident for tax purposes, the ITA has recently formed a committee to examine the current legislative provisions, including the revision of the definition of the terms, “Israeli Resident” and “Foreign Resident,” as defined in Section 1 of the Income Tax Ordinance [New Version], 5721-1961 (the “Ordinance”).
The committee’s recommendations include some significant changes to the current law, which on one hand will bring certainty from the tax authorities perspective as to who would be considered an Israeli tax resident, however at the same time creating uncertainty from the taxpayer’s perspectives. Additionally, the changes would make it much more difficult for the taxpayer to claim not to be an Israeli resident. The committee’s recommendations include the following:
• The “quantity test” would be conclusive and determine that an individual who stays in Israel for more than 183 days in a tax year, or alternatively, stays in Israel for more than 60 days in a tax year and for more than 450 days in the last three tax years, would be considered an Israeli Resident for tax purposes.
However, from the taxpayer’s position, if an individual does not stay in Israel for the required periods mentioned, the ITA may still be able to utilize the “center of life” test, and determine that the individual is in fact an Israeli resident for tax purposes.
• Moreover, in accordance with the committee’s recommendations regarding splitting time between Israel and abroad, if leaving your family in Israel while spending most of your time abroad on business (and spending 90 days or more in Israel), you will be defined as an Israeli resident, without the ability to dispute.
On the other hand, in the event where an individual is present in Israel for less than 90 days throughout the tax year (while his or her family lives in Israel), the ITA may still claim that he or she is an Israeli resident, if they meet the “center of life” test.
It is clear that should the recommendations be accepted as they are, they would affect, among others, those individuals working in the hi-tech industry who have relocated abroad for employment reasons, but are unable to relocate their family with them. Those individuals may find themselves paying taxes to Israel (including Social Security payments) despite the fact they work and spend most of their time abroad. It is clear that those individuals must at least start planning their Israel visiting schedule to avoid extra tax payments in the near future.
Boaz Feinberg is a partner and head of the tax and financial regulation department. Royi Heilig is a junior associate at ZAG-S&W international law firm. The department specializes in advising corporations and high-net-worth individuals on a comprehensive range of subjects relating to taxation.