Many Israelis who contact us before moving abroad or as part of a relocation process want to understand whether it is possible to sever Israeli tax residency, what the practical meaning of tax residency severance is, how residency status is examined in practice, which steps should be taken at the planning stage, and what should also be arranged with the National Insurance Institute.
Severing tax residency is not a technical step, and it is not examined only by counting days. The Israel Tax Authority and the courts examine the full set of circumstances, including the center of life, the scope of ties to Israel, and the individual’s actual conduct. Such a move may have tax, reporting, and social security implications. It is therefore important to understand in advance how Israeli tax residency is examined, what it means to become a foreign resident for tax purposes, and what should also be arranged with the National Insurance Institute.
How Residency for Tax Purposes Is Determined in Israel
In Israel, the question of tax residency determines the scope of an individual’s tax liability. It is therefore critical for anyone considering a move abroad or already living and operating outside Israel. Under the Israeli tax system, Israeli residents are liable to tax on their worldwide income, while foreign residents are liable to tax in Israel only on income that has an Israeli source or connection. Therefore, before examining how much tax must be paid, it is first necessary to determine whether, under tax law, the individual is still considered an Israeli resident for tax purposes or may be considered a foreign resident for tax purposes.
Under Section 1 of the Income Tax Ordinance, residency is determined by a combined test: quantitative presumptions based on days of presence in Israel, together with a substantive center of life test. It is therefore not enough to examine how many days a person stayed in Israel. It is also necessary to examine where the person’s permanent home, family, place of occupation, economic interests, and personal ties are located. This is the basis for any examination of tax residency severance and for any assessment of how to prove residency severance in practice.
The Quantitative Test
The Ordinance provides two presumptions based on days of presence in Israel. Under the first presumption, an individual who stayed in Israel for 183 days or more in a tax year will generally be considered an Israeli resident. Under the second presumption, an individual may be considered an Israeli resident if they stayed in Israel for 425 days in total during the tax year and the two preceding years, provided that they stayed in Israel for at least 30 days in the tax year under review. However, these are rebuttable presumptions, and therefore they do not, on their own, conclusively determine the question of residency. For anyone asking when tax residency can be severed, the day-count test is an important starting point, but it is not the end of the analysis.
For a person moving abroad, the practical meaning is clear. The number of days spent in Israel is an important factor, but it is not decisive on its own. Even if a person spends an extended period outside Israel, the question will still be examined by looking at where their home, family, economic activity, and main personal ties are actually located.
The Center of Life Test
The main test for determining residency for tax purposes is the center of life test. This is a substantive test that examines all of the individual’s life circumstances. In Civil Appeal 477/02 Arie Gonen v. Haifa Assessing Officer, the Supreme Court held that both the objective aspect must be examined, meaning where most of the actual ties are located, and the subjective aspect, meaning where the individual personally views their center of life as being located. Each case is examined according to its own circumstances.
In practical terms, the Israel Tax Authority and the courts examine, among other things, the location of the permanent home, the place of residence of the spouse and children, the place of employment or business activity, the location of economic interests, and the nature of personal ties. In practice, the decision is made based on the overall picture, not on a single fact.
Case law also emphasizes that severing tax residency is not always a clear-cut event. It is sometimes a process examined according to the sequence of actions actually taken. The case law further indicates that significant business activity abroad does not, in itself, guarantee tax residency severance, especially where substantial personal, family, and economic ties remain in Israel.
What Is the Meaning of Tax Residency Severance?
The practical meaning of tax residency severance is a change in the scope of tax liability in Israel. As long as a person is considered an Israeli resident for tax purposes, they may be liable to tax in Israel on their worldwide income. If they cease to be considered an Israeli resident, their Israeli tax liability is generally reduced to income that has an Israeli source or connection. For those whose main activity, work, or investments are outside Israel, this may be a highly significant change in terms of exposure to Israeli tax on foreign income and reporting obligations.
In addition, tax residency severance may allow for tax planning that is better aligned with the destination country, and in some cases may also affect the future assessment of tax rights and benefits.
Where most income is generated abroad, and the destination country applies lower tax rates or more favorable tax rules, tax residency severance may lead to tax savings, reduced bureaucratic complexity, and a lower risk of double taxation, especially where a relevant tax treaty exists. This is one of the key aspects of any tax planning process for a move abroad or taxation of Israelis in relocation. However, these benefits are not automatic, and they depend on the circumstances of each case.
On the other hand, tax residency severance may also have consequences that should be considered in advance. In certain cases, it may result in the loss or reduction of social security rights in Israel, and even after tax residency has been severed, some income may still remain taxable in Israel. This is in addition to the evidentiary and bureaucratic complexity of the process.
When Should Tax Residency Severance Be Considered?
Tax residency severance should be considered when the move abroad is long-term, when most income is foreign-source income, and when the main economic activity takes place outside Israel. The more prolonged, stable, and supported by a genuine shift in the center of life the move is, the greater the need to examine the tax status at an early stage. In other words, anyone planning relocation, where income tax is expected to be a significant part of the overall picture, should examine as early as possible whether there is a basis for considering tax residency severance.
A material change in the center of life is also a clear indication that the issue should be examined in depth. The relocation of the spouse and children, permanent residence in another country, opening local bank accounts, and permanent employment or management of a business outside Israel may strengthen the position that the center of life has indeed moved.
How Tax Treaties May Affect the Examination of Residency and Tax Liability
Where a tax treaty exists between Israel and the destination country, it is not enough to examine residency only under Israeli law, because the treaty may affect the determination of the country of residence and the allocation of taxing rights between the countries.
The complexity increases especially in cases where substantial ties to Israel are maintained alongside real activity abroad, such as business activity, an available apartment, family, or an extended stay in Israel. In such situations, even significant activity abroad is not always sufficient to determine the question of residency.
Most tax treaties include a tie-breaker mechanism for cases of dual residency. Usually, the analysis examines, in order, the permanent home, the center of vital interests, the habitual abode, and then nationality. If this still does not resolve the dispute, the matter may be referred for agreement between the tax authorities of the two countries.
The practical conclusion is that anyone moving abroad should examine not only the number of days of presence, but also the relevant treaty and the full range of ties to both relevant countries.
When Does the Question of Residency Become More Complex?
Although moving abroad may sometimes appear to create a clear picture, in practice there are cases in which the question of residency requires a more careful examination. The main difficulty arises when there is a gap between the actual date of departure and the date on which it can be convincingly established that the center of life has indeed moved from Israel. In such situations, even a relatively short transition period may raise questions regarding tax treatment and reporting.
Additional complexity relates to how the facts are examined. Tax residency severance is not determined based on a single declaration or one document, but according to an overall picture of residence, family ties, economic activity, documentation, and consistent conduct over time. Therefore, the less clear-cut the actual situation is, the greater the importance of a structured examination in advance and of building a factual foundation that supports the position being taken.
In addition, cases that require special attention are those in which significant ties to Israel are maintained alongside an active life abroad. For example, where there is an active business in Israel, an available apartment, family remaining in Israel, two permanent homes, or activity carried out in two countries simultaneously, the question of residency is not examined based on a single factor, but according to how all the ties combine into one overall picture. In these situations, early review and proper planning may reduce uncertainty and assist in making more accurate decisions.
How Is Tax Residency Severance Carried Out in Practice?
From a procedural perspective, one of the common steps is to examine the manner of reporting to the Israel Tax Authority in the year of departure and in the nearby years. In many cases, this is done by filing an annual tax return together with Form 1348. However, it is important to understand that submitting the form in itself does not create tax residency severance and does not replace the substantive examination of the facts and actual conduct. Anyone seeking to understand how to sever residency, or whether Form 1348 for tax residency severance is sufficient on its own, should remember that it is only one part of the process.
Alongside the form, the taxpayer is generally required to establish a documentary foundation supporting the transfer of the center of life, such as a lease agreement or purchase of property abroad, work permits or employment confirmations abroad, documentation of children’s schooling abroad, bank documents, and evidence of economic activity abroad. The more complex the picture, the greater the importance of orderly, consistent, and persuasive documentation.
After the materials are submitted, the Israel Tax Authority may examine the data as part of an assessment proceeding or at a later stage. However, documents alone are not sufficient if the actual conduct contradicts the position asserted by the taxpayer.
The correct approach is not to create an artificial appearance, but to build an orderly foundation that reflects reality. Anyone planning to move abroad should examine in advance their housing situation, the structure of their economic activity, the issue of family ties, assets in Israel, and the documentation that may be required if the question of residency is examined in the future. In particularly complex cases, it may also be appropriate to consider obtaining a professional opinion.
There are also cases in which departure for a relatively short period will not be sufficient to establish a genuine change in the center of life. For entrepreneurs and businesspeople, it is important to examine carefully both the number of days spent in Israel and the personal and business ties that remain there.
The practical conclusion is clear: tax residency severance is not a technical matter, and it is not determined based on a declaration alone. It is examined according to genuine conduct, consistency, documents, and the full set of circumstances. It is also important to remember that severing residency for income tax purposes and severing residency for National Insurance purposes are not identical and do not occur automatically.
Severing Residency for National Insurance Purposes
Alongside tax residency severance for income tax purposes, it is important to also arrange one’s status with the National Insurance Institute. Failure to do so may result in a debt for National Insurance contributions and health insurance contributions, while severing residency status with the National Insurance Institute may also affect entitlement to health services and additional social security rights. The issue should therefore be examined carefully, especially in any case of moving abroad that involves severing residency.
For more information, see the article: “When Does Moving Abroad Really Sever Residency In Israel”
Conclusion
If you are considering moving abroad or have already moved, it is advisable to carry out a professional review as soon as possible. A thorough examination at the planning stage may help reduce tax exposures, build appropriate documentation, and arrange your status with the relevant authorities.
Nimrod Yaron & Co. has extensive experience advising individuals and companies on Israeli and international tax matters, including tax residency severance, relocation, tax treaties, and arranging status with the National Insurance Institute. If you are considering moving abroad or wish to examine your residency status, we would be pleased to assist with a professional review and proper, comprehensive planning in advance.
Questions and Answers
What is tax residency severance?
Tax residency severance is a situation in which an individual ceases to be considered an Israeli resident for tax purposes, and as a result, their Israeli tax liability is generally reduced to income that has an Israeli source or connection. In practice, this is a substantive question examined according to the full circumstances of the individual’s life, and not based on a declaration alone.
Does moving abroad automatically sever residency?
No. Moving abroad is an important fact, but it is not sufficient in itself. The Israel Tax Authority examines the full set of circumstances, particularly the center of life, the scope of ties remaining in Israel, and the individual’s actual conduct over time.
Is the number of days spent in Israel enough to determine residency?
Not always. Days of presence are an important component of the analysis, but they are not the whole picture. The place of residence, family unit, place of employment or business activity, assets, accounts, and economic interests may all affect the conclusion.
Can residency be severed if an apartment remains in Israel?
The mere existence of an apartment in Israel does not necessarily prevent tax residency severance, but it may certainly be a significant factor in examining whether there is a permanent home and where the center of life is located, especially if the apartment is available for residence and is actually used during visits to Israel.
Is Form 1348 enough to sever residency?
No. Form 1348 is an important reporting tool in appropriate cases, but it does not automatically create tax residency severance and does not replace the substantive examination of all the facts, documents, and actual conduct.
Does tax residency severance eliminate tax on all Israeli income?
No. Even after residency has been severed, certain income that has an Israeli source or connection may still be taxable in Israel, depending on the type of income, the source of the income, and the law that applies to it.
לא. גם לאחר ניתוק התושבות, ייתכן שהכנסות מסוימות בעלות זיקה לישראל ימשיכו להיות חייבות במס בישראל, בהתאם לסוג ההכנסה, למקור ההכנסה ולדין החל עליהן.
Does tax residency severance for income tax purposes automatically sever residency for National Insurance purposes as well?
No. These are two separate processes. Even if a person is considered a foreign resident for tax purposes, the National Insurance Institute may still examine their status independently and reach a different conclusion based on the full set of circumstances.
Can a person have two centers of life at the same time?
In some cases, especially among entrepreneurs, investors, and businesspeople who operate over time in more than one country, case law shows that the court may examine a reality in which there are strong ties both to Israel and to another country. Therefore, even if a significant business center has been established abroad, this is not necessarily enough if, at the same time, family, an available home, extended stays, or substantial economic ties remain in Israel.
How can tax residency severance be proven?
To support a claim of tax residency severance, it is not enough to declare that one has moved abroad. It is necessary to present a factual and documentary foundation that consistently demonstrates that the center of life has been transferred outside Israel. The examination is carried out according to the full set of circumstances, and therefore considers, among other things, the place of actual residence, the place of residence of the family, the place of employment or business activity, the location of economic interests, and the ties that remain in Israel. For this purpose, it is common to rely on lease agreements or property purchase documents abroad, employment confirmations, school records, bank documentation, and additional evidence showing that day-to-day life is indeed conducted in another country.
