Dear clients, friends and colleagues,

We are pleased to update you regarding a proposed bill recently published by the Israeli Ministry of Justice on July 24, 2023 (the “Proposed Bill“). This bill addresses the definition of “Israeli Resident” and “Foreign Resident” for Israeli income tax purposes concerning individuals and suggests significant changes to existing law.

It is worth noting that the Proposed Bill is based on recommendations from the esteemed Committee to Reform International Taxation (the “Committee“), whose members include representatives from the Israel Tax Authority (the “ITA“), the Institute of Certified Public Accountants, and the Israeli Bar, including Herzog’s very own Mr. Meir Linzen and Mr. Guy Katz (for our previous client update regarding the full Committee’s report >> click here). With broad agreement reached between the ITA and the public representatives on the Committee, the legislation is expected to progress smoothly. However, it’s important to remember that until the legislative process is complete, there may still be some changes to the Proposed Bill before its final enactment.

Before submission to the Knesset, the Proposed Bill has been made available for public comments until August 8, 2023.

Outlined below are the key changes suggested by the Proposed Bill:

Tax Residency in Israel under Current Law

Currently, under the Israeli Income Tax Ordinance [New Version], 5721-1961 (the “Ordinance“), an Israeli resident is defined as an individual whose “center of life” is in Israel. This definition generally aligns with the commonly used “place of vital interests test” found in bilateral tax treaties and aims to ascertain an individual’s residency based on a comprehensive assessment of familial, economic, and social ties to a particular jurisdiction.

Under the Ordinance, there is also a rebuttable presumption that a person is an Israeli resident if (A) they have stayed in Israel for at least 183 days during the relevant tax year or (B) they have stayed in Israel for at least 30 days during the relevant tax year and a total of 425 days during a three-year period that includes the relevant tax year and the two preceding tax years. Importantly, for tax purposes, a “day” includes a “part of a day,” encompassing both the day of arrival to and the day of departure from Israel.

Additionally, the Ordinance defines a “foreign resident” as (A) any person who is not an Israeli resident or (B) any individual who has stayed outside of Israel for at least 183 days during the tax year and the subsequent tax year, while their center of life was outside of Israel during the subsequent two years after the aforementioned two years.

Expected Changes to Tax Residency in Israel under the Proposed Bill

The existing “center of life” test, used to determine an individual’s Israeli tax residency, has been a source of uncertainty due to its vagueness and reliance on a comprehensive analysis of all relevant facts and circumstances. Addressing the relatively fundamental question of an individual’s residency status for income tax purposes has proven to be complex, leading to challenges in its implementation. According to the Explanatory Notes accompanying the Proposed Bill, this vagueness has hampered the certainty required in tax law and contributed to friction between taxpayers and assessing officers. Moreover, the lack of clarity has created a risk of taxpayers adopting aggressive tax reporting positions based on perceived tax advantages. The Proposed Bill seeks to mitigate these issues by introducing clearer and more objective criteria for tax residency based on the number of days spent in Israel.

To provide clarity and certainty to taxpayers, the Proposed Bill introduces several irrebuttable presumptions of tax residency based primarily on the number of days spent in Israel. However, if none of the specific criteria of these presumptions are met, the existing “center of life” test, along with the current rebuttable presumptions, will remain applicable.

Irrebuttable Presumptions of Israeli Tax Residency under the Proposed Bill

The Proposed Bill introduces certain presumptions of Israeli residency, meaning that individuals who meet the conditions outlined in these presumptions will be considered Israeli residents, irrespective of the location of their “center of life.” These presumptions cannot be rebutted by the taxpayer or the ITA.

1. 183 Days in Israel during any Two-Year Period: If an individual spends at least 183 days in Israel during any two-year period, they will be considered an Israeli resident for income tax purposes in both tax years.

2. 100 Days in Israel and 450 Days over Three Tax Years: An individual who spends at least 100 days in Israel during the relevant tax year and a total of 450 days over the tax year and the two preceding tax years will be considered an Israeli resident, unless they spend at least 183 days in a “Reciprocal Country” during each of these three years. For the purposes of the Proposed Bill, a “Reciprocal Country” is any nation that has a bilateral double tax treaty with Israel. Residency in such a country will be recognized only if the individual provides a residency certificate from that country’s tax authorities.

3. 100 Days in Israel with Spouse’s Israeli Residency: Additionally, an individual who stays at least 100 days in Israel during the tax year, and whose spouse is an Israeli resident during that year, will also be presumed an Israeli resident. Note that a “spouse” includes common law partners for all purposes of the Proposed Bill.

Irrebuttable Presumptions of Foreign Tax Residency under the Proposed Bill

The Proposed Bill introduces certain presumptions of foreign residency, meaning that individuals who meet the conditions outlined in these presumptions will be considered foreign residents, irrespective of the location of their “center of life.” These presumptions cannot be rebutted by the taxpayer or the ITA.

1. Less than 30 days in Israel: An individual who stays in Israel for less than 30 days in each of the “Tested Tax Years” will be considered a foreign resident. However, an exception applies if the individual stayed in Israel for 15 days or more within the first 30 days of the first Tested Tax Year or the last 30 days of the last Tested Tax Year.

2. Less than 60 days in Israel: Both an individual and their spouse, each spending fewer than 60 days in Israel during each of the Tested Tax Years, will be considered foreign residents. Nevertheless, an exception applies if either the individual or their spouse spends 30 days or more in Israel within the first 60 days of the first Tested Tax Year or the last 60 days of the last Tested Tax Year.

3. Less than 100 days in Israel with Reciprocal Country ties: In cases where both an individual and their spouse spend fewer than 100 days in Israel during each of the Tested Tax Years and were residents of a Reciprocal Country, where they spent at least 183 days each year, they will be considered foreign residents. However, an exception applies if either the individual or their spouse spent 50 days or more in Israel within the first 100 days of the first Tested Tax Year or the last 100 days of the last Tested Tax Year.

The “Tested Tax Years” are defined as any of the following:

1. The relevant tax year and the three subsequent tax years;

2. The relevant tax year, the preceding tax year, and the subsequent tax year;

3. The relevant tax year and the two preceding tax years.

Additional Provisions with Respect to Tax Residency under the Proposed Bill

The Proposed Bill also clarifies that notwithstanding the definitions of “Israeli Resident” or “Foreign Resident,” an individual can be considered a tax resident in Israel during a portion of a year with respect to the tax year in which the individual became an Israeli resident or ceased being an Israeli resident. While partial-year residency has been common in general practice, the codification of this alternative under the Proposed Bill is expected to add certainty to tax residency questions.

Moreover, it is essential to note that the Explanatory Notes accompanying the Proposed Bill emphasize the continued precedence of bilateral tax treaties over domestic law, as is the prevailing practice under existing legislation. Therefore, if an individual is categorized as a non-Israeli resident under the provisions of a relevant treaty, such classification will supersede the new legislation’s criteria for defining Israeli residents or foreign residents in the Ordinance. This reinforces the significance of international tax treaties in determining an individual’s tax residency status and ensures consistency in cross-border tax implications.

Summary of Proposed Changes to the Israeli Residency Test

We understand that these potential changes may raise questions and concerns for you. To provide you with a comprehensive overview and facilitate a better understanding of the alternatives, we have prepared a table summarizing the proposed criteria for Israeli tax residency under the Proposed Bill. You can find the table below for your reference.

Our team is dedicated to guiding you through the implications of these changes and offering any assistance you may require. Please feel free to reach out to us with any inquiries you may have or for a more detailed explanation of the table.