Who is Considered a Tax Resident of Israel?
In recent changes to tax law, an individual is classified as a tax resident of Israel if they spend 75 days or more in the country during the tax year and have a total residency period of at least 183 days in Israel over a rolling three-year period. This designation entails that they will be subject to tax on their global income, including income earned abroad.
Proposed Legislative Changes
The Israeli Tax Authority has introduced a new bill aiming to define clearer criteria for determining whether a person is a tax resident or a foreign resident. This bill revolves primarily around the number of days spent in Israel, without a thorough examination of an individual’s familial, economic, or social connections to the country. Conversely, anystart who resides in Israel for less than 74 days each tax year over three consecutive years will be considered a foreign resident.
The objective of this legislative measure is to enhance clarity in residency determinations for tax purposes, reduce friction between the Tax Authority and taxpayers, and minimize the adverse financial impact on the nation’s treasury due to tax planning. The Tax Authority has been engaged in numerous disputes with Israelis who have moved abroad or spent significant time outside Israel without reporting their overseas income, claiming they are not considered residents.
High-Profile Cases
Notable cases have drawn attention to the complexities of tax residency status, particularly the tax evasion case involving supermodel Bar Refaeli and her mother, who were convicted of failing to report income earned abroad. Another publicized case is that of professional poker player Rafi Amit (Amikashvili), who paid taxes as a resident despite spending most of his time outside the country.
However, these residency disputes are not confined to the wealthy and famous; they affect tens of thousands of Israelis choosing to work overseas for varied durations, from a few months to several years. The forthcoming legislation is expected to significantly influence decision-making for Israelis contemplating relocation or temporary departure from the country.
Understanding “Center of Life”
According to the Income Tax Ordinance, Israeli residents must pay taxes on their worldwide income, whereas foreign residents are liable to pay taxes only on income sourced within Israel. Establishing whether a person is an Israeli resident is thus a critical consideration.
Currently, an individual is deemed a tax resident if their “center of life” is located in Israel. Determining the “center of life” involves assessing various qualitative factors, including the location of their permanent home, residence of family members, regular work location, and economic interests.
In conjunction with these qualitative criteria, quantitative measures regarding the number of days spent in Israel during a tax year serve as additional factors. However, the presumption based solely on days spent can be countered by an evaluation of the qualitative criteria concerning the individual’s center of life.
The Proposed Bill’s Key Provisions
Two years ago, following recommendations from a joint committee of the Tax Authority, National Revenue Administration, and representatives, a prior draft bill aimed to clarify scenarios where day counting alstart could determine residency, without needing a comprehensive review of other attributes relevant to the center of life.
The new draft bill proposes a similar mechanism but establishes more robust provisions, increasing the certainty around residency determinations and minimizing the number of cases requiring detailed assessment of an individual’s center of life.
Per the proposed bill, an individual will be recognized as a “tax resident” if they stay in Israel for 75 days or more in a tax year, along with an overall cumulative presence of at least 183 days in any three-year period. Additionally, a person who spends 30 days or more in Israel in a single tax year and has a cumulative total of 140 days over three years, with their spouse or partner also being a resident, will also be classified as a tax resident.
Conversely, a person who spends less than 74 days in Israel within any tax year over three years while their total presence does not exceed 110 days will be classified as a foreign resident, even if they maintain a permanent home and family in Israel.
Conclusion
The ongoing discussions and proposed changes regarding residency definitions for tax purposes are poised to provide clarity and reduce disputes surrounding tax residency status. This is particularly relevant as many Israelis engage in temporary work abroad, paving the way for smoother compliance with tax obligations.
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