The government published a draft bill this week which proposes to clarify who is a resident for Israeli tax purposes. This is not the same as citizenship, religion or national insurance status. The bill would be especially important to tourists who spend lengthy periods in Israel and anyone who relocates abroad from Israel for work/family reasons.
Current law
Subject to any tax treaty, an individual is generally fiscally resident in Israel if their center of living is in Israel, based on overall family, economic, and social circumstances. A rebuttable presumption of residency exists if the individual is present in Israel 183 days in one year or 425 days over three years, including 30 days in the third year.
It currently takes at least four tax years to lose Israeli residency: two years present and at least 183 days abroad, plus two years of center of living abroad.
Israeli residency proposals
The government says the present rules cause uncertainty, so the bill proposes to add more rules on top of the present rules.
In addition to the present rules, an individual would be considered an Israeli resident if that person is: (1) present in Israel 183 days in the tax year plus 183 days in the year before or after; or (2) present in Israel 450 days over three years, including 100 days in the third year – UNLESS that person was resident and present 183 days per year in a country that has a tax treaty with Israel (and holds residency confirmation from its tax authority); or (3) present in Israel 100 days and their spouse or partner is an Israeli resident.
Foreign residency proposals
It is proposed that an individual whose center of living is still in Israel in a tax year may still be deemed a foreign resident if that person is: present in Israel under 30 days that year, plus 30 days per year in one of the following three periods: (a) the next three years, or (b) the year before and year after or (c) two years before. In the first or last 30 days of any year, under 15 days in Israel would be needed; or that person and their spouse or partner is present under 60 days that year and 60 days per year in one of the above three periods.
In the first or last 60 days of any year, under 30 days in Israel would be needed or person and their spouse or partner is present under 100 days that year in one of the above three periods and is present 183 days per year in a tax treaty country in that period (and holds residency confirmation from its tax authority). In the first or last 100 days of any year, under 50 days in Israel would be needed.
Proposed commencement
If enacted, the proposed new rules above would apply to the residency of an individual in the year after the year they become effective, i.e. apparently for 2024 onwards.
It remains to be seen what is enacted and when, since cabinet and Knesset approval is needed. Subject to that, here are a few comments:
•The 30/60/100 day annual limits on visits to Israel seem harsh.
•Tourists may become accidental residents – beware!
•For leavers, there would still be a limbo period when they do not know if they are still an Israeli resident or not.
•Israel’s exit tax (really capital gains tax) will continue to apply to people who do cease to be resident. The above proposals would complicate the question of when that is.
•Finding a spouse or partner may sometimes help!
•Residency for part of a year would remain possible.
•It is unclear what would happen if a person is present in Israel partly in the first or last days in a year and partly in the middle, e.g. 10 days in Israel in January, 20 days in July.
•The 450-day test seems to overlap with the older 425-day test, which would be confusing.
•Other countries would not be bound by the present or proposed Israeli rules, only by any tax treaty with Israel.Tax treaties contain residency “tie-breaker” rules which are yet another set of residency rules! Israel has around 60 tax treaties which are different from each other, especially those with the USA and South Africa.
•The current proposals apparently do not repeat earlier proposals about notifying the Israel Tax Authority of your movements or payments on account of exit tax.
•The proposals only refer to individuals, not companies.
Watch this space! 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 Consulting & Tax Ltd. leon@hcat.co