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Memorandum of Law to amend the Income Tax Ordinance (Place of Residence of an Individual), 2023

Opening

In November 2021, the report of the Committee for the reform of International Taxation was published. The report consists of ten chapters (and an appendix chapter) which are divided into three topics. The first issue is international taxation of individuals. In this context, we can enumerate the chapters dealing with single residency, exit tax, and taxation of new immigrants and returning residents. The second issue international taxation of corporations, which includes foreign tax credits including indirect taxation, Amendment of the foreign controlled company regime and reference to branch tax and hybrid discrepancies. The third issue is increasing reporting obligations, mainly for holding foreign resident entities. On the basis of the Committee's report, on July 24, 2023, the Finance Minister published a memorandum of law to amend the Income Tax Ordinance "Place of Residence of an Individual", which aims to regulate two types of presumptions for determining the individual's place of residence based on the number of days he stays in Israel (the "Memorandum of Law").

In this list we will briefly review the Memorandum of Law based on the recommendations of the committee regarding "foreign resident" and "resident of Israel".

It is important to emphasize that this is only a memorandum of law, which is expected to undergo changes in the Committee of Finance and the Knesset until the final version, if approved, and therefore it is recommended to wait for the final legislative text. In addition, the Memorandum of Law must be read additionally with the memorandum of law in relation to section 100A of the Ordinance ("Exit Tax").


Resident of Israel (A1) absolute presumptions for defining the residency of an individual:

  1. An individual who resided in Israel for two consecutive tax years, 183 days or more in each tax year.

  2. An individual who resided in Israel in a particular tax year for 100 days or more, and the total period of stay in the tax year and the two preceding years is 450 days or more. *This presumption shall not exist if the individual spent 183 days or more in a "contracting state" during those tax years. * *"contracting state" – a country with which the State of Israel maintains a tax treaty (section 196 (a) of the Ordinance), in paragraph (3) of the Memorandum of Law was noted that "an individual shall be deemed to be a resident of a remunerative state in a particular tax year, only if he has a residency certificate for the purposes of an international agreement with the State of Israel from the tax authorities in that remunerative country for that year." However, as stated in the explanatory notes to the Memorandum of Law, the individual is not obligated to submit the approval to the Israeli tax authorities proactively, rather it is proposed to leave the examination to the Assessing Officer, who may require forwarding such documents. On the practical level, this subsection may have a real difficulty in proving the number of days spent in the contracting state. In addition, the question arises what about an individual who moved to another treaty country during the period under consideration and provides both countries with a residency permit?

  3. An individual who has resided in Israel for 100 days or more per year, and his/her spouse, including a "common-law spouse," is an "Israeli resident" according to the center of life test. It is necessary to examine who is a "common-law partner" according to general law.


Practical emphases regarding the presumption of an Israeli resident:

  1. It is possible to sever residency or return to Israel during the tax year, subject to the "center of life" test.

  2. The provisions of the tax treaty prevail over the presumptions so that even if an individual is considered an "Israeli resident", he will still be entitled to the benefits of the individual tax treaty as a resident of the foreign country, if according to the "tiebreaker" tests, he will be considered a resident of the foreign country for the purposes of the tax treaty (requires an individual examination).


Non resident - (c)(1) absolute presumptions to define the residency of an individual:

A "foreign resident" shall also be considered a person whose "center of life" was in Israel in that year if:

  1. An individual who resided in Israel for less than 30 days in each tax year for four consecutive tax years will be considered a foreign resident from the first tax year of his stay. exceptional - presumptions for determining shall not apply "if within the first 30 days of the first of the tax years under consideration or within the last 30 days of the last of the tax years under review, he resided in Israel for 15 days or more;"

  2. An individual who resided in Israel for less than 30 days in each tax year for three consecutive tax years will be considered a foreign resident starting from the second tax year of his stay. Exceptional - presumptions for determining shall not apply "if, within the first 30 days of the first of the tax years under consideration or within the last 30 days of the last of the tax years under review, he resided in Israel for 15 days or more;"

  3. An individual and his/her spouse, including a common-law spouse, who resided in Israel for less than 60 days in each tax year, for four consecutive tax years, will be considered foreign residents from the first tax year of their stay. exceptional - presumptions for determining shall not apply "if within the first 60 days of the first of the tax years under consideration or within the last 60 days of the last of the tax years under review, one of the spouses resided in Israel for 30 days or more;"

  4. An individual and his/her spouse, including a common-law spouse, who resided in Israel for less than 60 days in each tax year, for three consecutive tax years, will be considered foreign residents starting from the second year of their stay. exceptional - presumptions for determining shall not apply "if within the first 60 days of the first of the tax years under consideration or within the last 60 days of the last of the tax years under review, one of the spouses resided in Israel for 30 days or more;"

  5. An individual and his/her spouse, including a common-law spouse, who resided in Israel for less than 100 days in each tax year, for four consecutive tax years, will be considered foreign residents from the first tax year of their stay. *Provided that they have stayed in a "contracting state" for 183 days or more in each of the tax years and have a residency permit for tax purposes* exceptional - presumptions for determining shall not apply "if, within the first 100 days of the first of the tax years under consideration or within the last 100 days of the last of the tax years under review, one of the spouses resided in Israel for 50 days or more;" An individual and his/her spouse, including a common-law spouse, who resided in Israel for less than 100 days in each tax year, for three consecutive tax years, will be considered foreign residents starting from the second tax year of their stay, provided that they stayed in a "contracting state" for 183 days or more in each of the tax years and have a residency certificate for tax purposes* exceptional - presumptions for determining shall not apply "if, within the first 100 days of the first of the tax years under consideration or within the last 100 days of the last of the tax years under review, one of the spouses resided in Israel for 50 days or more;"


Practical emphases regarding the decisive presumptions of a non-resident

  1. It is necessary to be familiar with the exceptional requirements, which in some cases may prevent the application of the decided possession to a foreign resident. For example, the presumption decided in subsection (2) will not apply if a couple left for Cyprus (which is not a contracting state) on January 1, 2024, stayed less than 60 days in a tax year during tax years 2024 and 2025 and returned to Israel on November 20, 2026.

  2. There may be real difficulty in proving the number of days spent in the contracting state (for example, a country member of the European Union).

  3. Whenever the absolute presumptions are not met, residency will be assessed according to the center of life test according to current law, as formulated in courts in the recent decades.


Summary

To the extent that the provisions of the Memorandum of Law become final legislation, they will increase the certainty of the taxpayers, who will be able to finance their steps in advance. However, since these are forward-looking tests, confessions of severance of residency will continue to be accepted only three or four years after leaving Israel. Therefore, it will still be important to plan the departure in advance and be prepared for a situation in which the center of life test will continue to apply under existing law. In addition, the proposed legislation does not, as stated, prevent the use of a treaty exemption, insofar as the individual is considered a resident of a remunerative state, even though in terms of the presumptions he is considered a resident of Israel. It will also be appropriate to follow the new reporting requirements that will apply after leaving Israel and are expected to be published in the additional legislative memorandum dealing with upgrading the provisions of section 100A of the Ordinance ("exit tax"). Finally, it should be emphasized that the applicability provisions in the Memorandum of Law stipulate that the law will apply to the determination of residency of an individual in the tax year following the tax year in which the commencement date falls and thereafter, i.e., if the law is approved by the end of 2023, including the commencement date, then the validity of the presumptions decided on both the proposed definition of an Israeli resident and the proposed definition of a foreign resident, will come into effect at the beginning of 2024. However, according to the Memorandum of Law, the days of stay in Israel must also be considered in the years preceding the date of commencement. According to the same assumption, the Memorandum of Law cites the following example: If an individual resided in Israel for less than 30 days in 2023 (the tax year in which the commencement day applies) and in 2022 and resides less than 30 days in Israel in 2024, the permanent possession of a foreign resident as stated in subsection (1) will apply. In this case, the presumption will apply to 2024 (and he will be considered a foreign resident in that year) but will not apply to the tax years 2022-2023 (for which the center of life test will need to be examined under existing law).

The office staff will be happy to assist with further questions and clarifications. You are invited to read additional articles and updates on our office’s website. The contents of this list do not constitute an opinion and/or legal advice on the issues discussed and, in any case, it is recommended to consult with a tax expert before taking legal and/or other action based on this list.

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