Recently, a draft bill was published, within the framework of which it is proposed to update the definition of "resident of Israel" and "foreign resident" in the Israeli Income Tax Ordinance1 ("Draft").
Currently, an individual's residency as a resident of Israel or as a foreign resident is determined under the center of life test. The complexity of applying the center of life test has caused uncertainty regarding a person's residency. Therefore, the Israeli Tax Authority proposes to establish a number of definitive presumptions2 based only on the number of days the individual and his family stay in Israel or abroad. If the presumptions exists, the individual will be deemed a resident of Israel or a foreign resident, as the case may be. In cases that do not fall within those presumptions, the current law will apply, and residency of the individual will be determined under the life center test.
Before we expand on the details of the Draft, we would like to bring to your attention several important points:
1. The Draft has not yet gone through legislative procedures at the Knesset. However, it is expected that the proposal in its current form or a similar one will be completed into legislation in the near future.
2. There is the possibility that individuals who are classified according to the current law as foreign residents will be classified after the approval of the Draft, as residents of Israel. Therefore, we recommend to all those individuals who have recently immigrated or are expected to immigrate abroad, to advance and regulate their status as non-residents with the income tax authorities and the National Insurance Institute, before completing the legislative procedures of the Draft.
Below we list the presumption:
The presumption which, if one of which exists, will deem an individual as a resident of Israel:
Alternative The proposed law Notes
1 If in a certain year the individual stayed in Israel for 183 days or more and in the year before or after the individual stayed in Israel for 183 days or more. This test checks an individual's days of stay over two years
2 if in a certain year the individual stayed in Israel for 100 days or more; and the total period of his stay in Israel in that tax year and in the two tax years preceding it, is 450 days or more. This test examines an individual's days of residence over three years;
Exception to the presumption: the presumption will not apply if in each of the above three years the individual stayed in a jurisdiction in which there is a tax treaty with the State of Israel3 for more than 183 days and is classified as a resident for tax purposes in that country (by providing a residency permit from that jurisdiction).
3 If in a certain year the individual stayed in Israel for 100 days or more and his spouse (including a common law marriage) is a resident of Israel. This test checks the days of residence of an individual in a certain year as well as the residency of his spouse.
Emphasis on the above presumption:
1. If one of the alternatives listed above occurs, the individual will be deemed a resident of Israel for the entire tax year.
2. The Draft states that an individual can still contend to be a resident of Israel only for part of the tax year - for example, if the individual immigrated abroad during the year, he can contend to be a foreign resident from the day he left.
Similarly, an individual who returned to Israel from abroad can still contend to be a resident of Israel only from the day he arrived in Israel.
3. The rules for determining residency in the tax treaty prevail over the provisions of binding presumption - for example, an individual who is defined as a foreign resident under the relevant tax treaty, but is defined as a resident of Israel under the above presumption, will be classified as a foreign resident.
Presumption which, if one of them exists, will deem an individual a foreign resident:
alternative The proposed law Clarifications
1 In each of the years considered4, the individual stayed less than 30 days in Israel Exception to presumption:
Presumption will not apply if within the first 30 days of the first year or within the last 30 days of the last year (within the tax years considered), the individual stayed in Israel for 15 days or more
2 In each of the years under review, the individual and his/her spouse stayed less than 60 days in Israel Exception to presumption:
Presumption will not apply if within the first 60 days of the first year or within the last 60 days of the last year (of the years under consideration), one of the spouses stayed in Israel for 30 days or more
3 In each of the years under consideration, the individual and his/her spouse spent less than 100 days in Israel and in each of those years spent more than 183 days in a treaty country and were classified there as residents for tax purposes (by producing a residence permit from that country). Exception to presumption:
Presumption will not apply if within the first 100 days of the first year or within the last 100 days of the last year (within the tax years considered), one of the spouses stayed in Israel for 50 days or more
In light of the above, we recommend to individuals who are staying abroad, to be careful and stay up to 29 days in Israel, so that the decisive presumption that they are foreign residents applies to them.
This is the end of the memorandum about the Draft to determine the classification of individuals as residents of Israel or as foreign residents. As soon as the Draft is legislated, our office will update on the subject.