Israel's Ministry of Justice has recently released a draft Bill aimed at significant changes to the definition of tax residency for individual income tax purposes.
Currently, an individual's tax residency in Israel is determined by the Income Tax Ordinance 5721-1961 (the Ordinance), which relies on the concept of 'centre of life' being in Israel, similar to the 'place of vital interests test' used in bilateral tax treaties. This test is supported by a rebuttable presumption that an individual is an Israeli resident if they have spent at least 183 days in Israel during the relevant tax year or at least 30 days during the relevant tax year and a total of 425 days during a three-year period, which includes the current year and the preceding two tax years.
The Ordinance also defines a 'foreign resident' as either someone who is not an Israeli resident or has spent at least 183 days outside of Israel during the tax year and the subsequent tax year, while their 'centre of life' was outside of Israel during the subsequent two years.
However, the ambiguity and broad scope of the 'centre of life' test have led to uncertainty in its application and created tensions between taxpayers and tax authorities, according to Israeli law firm Herzog. There is also a risk that taxpayers may exploit perceived tax advantages by adopting aggressive tax reporting positions. To address these issues, the new Bill proposes to reduce the significance of the 'centre of life' test and instead introduces a primary test based on a set of irrebuttable presumptions of tax residency primarily determined by the number of days spent in Israel. The 'centre of life' test will remain as a secondary consideration applicable only if none of the specific criteria of the presumptions are met.
The irrebuttable presumptions of residence are as follows: spending 183 days in Israel during any two-year period; spending 100 days in Israel during the tax year and 450 days over three tax years, with an exception for residence in a 'reciprocal country'; or spending 100 days in Israel during the year while having an Israeli-resident spouse.
Moreover, the proposed Bill introduces conditions that classify certain individuals as foreign residents regardless of any 'centre of life' factors. It explicitly states that an individual can be considered tax-resident for part of the year and non-resident for another part of the same year.
These proposed changes are based on recommendations from the Committee to Reform International Taxation, established in September 2021. The Committee includes representatives from the Israel Tax Authority, the Institute of Certified Public Accountants, and the Israeli Bar.
Interested parties can submit their feedback on the proposals until 8 August 2023.
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