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Israel Resident Tax Aspects

Israel Resident Tax Aspects

Israel Resident Tax Aspects

How is Individual Residency Determined? All Information on Determining Residency and Disconnecting Residency

To determine whether an individual is a resident of Israel or to terminate residency in Israel, it is crucial to establish where their center of life is. When individuals move to a country where the tax rate is lower than that of Israel, it may be advantageous for them to terminate their Israeli residency. However, this is only possible if they fulfill the criteria described below for determining their center of life abroad. The cessation of residency and the determination of residency status have implications for both income tax and social security contributions.
It is important to note- It is not always advisable to sever residency when moving to a foreign country! Sometimes, even if the residency remains Israeli, it is possible to reach a solution where no tax is paid in Israel, but many benefits are still retained.
As a result of the coronavirus pandemic, the concept of “forced residency” emerged, referring to individuals who were compelled to remain in a country solely due to coronavirus restrictions. Our firm manages a wide range of cases related to both the determination and termination of residency, as well as instances requiring agreements with foreign tax authorities.

Our firm has many professionals connected with many countries in the world, and we can help prevent double taxation and combine the severance of residency with the determination of residency in another country.

The center of life test for determining residency in Israel is divided into two tests: The Quantitative test and The Substantive- Quality test.

The Quantitative Test For Determining The Center of Life

In accordance with section 1 (2) – it is strong that the centre of an individual’s life in the tax year is in Israel-
(A) if he has resided in Israel in the tax year 183 days or more;
(B) if he resided in Israel in the tax year 30 days or more, and the total period of his stay in Israel in the tax year and in the two preceding years is 425 days or more;
Holdings can be contradicted if the substantive life centre test indicates residency in another country. An individual who wishes to claim that despite the existence of the presumption of the days is a foreign resident – will be required to submit Form 1348 in conjunction with an annual report.

New legislative initiatives of the Tax Authority are trying to determine that the power of the day is absolute power and not power that can be contradicted. This will mean that if the legislation passes – it will not be possible to determine that a person who is considered a resident according to the number of days – is not actually a resident thanks to the centre of life test (in contrast to the current situation).

The Substantive- Quality Test for Determining the Center of Life

The substantive-quality test considers the totality of the individual’s family, economic and social ties, including:

  • The location of their permanent home;
  • Their place of residence and the residence of their family members;
  • Place of normal or permanent occupation;
  • The location of their active and essential economic interests;
  • Place of activity in various organizations, associations, or institutions.

The test set forth in the case law for determining the centre of a taxpayer’s life is the combined test that includes two components:

One is objective – locating the place where most of the attachments to the assessee are.

And the other is subjectiveThis also reflects what they mean and where they see the center of their life.

In 2017 the definition of a “foreign resident” was changed as part of the 168 Income Tax Ordinance Amendment. It is now taken to mean a non-resident of Israel who has been abroad for at least 183 days a year and his center of life was not in Israel during the two tax years after these two years.

Tax Resolution 2519/17

An employee sent by a company to work abroad will be considered a resident of that treaty state for the purpose of withholding tax on his income from his salary abroad, provided that the following conditions are met:

  • The employee stays abroad for 36 months
  • He owns a permanent home outside of Israel in which he resides
  • The employee stayed in Israel for less than 75 days and the rest of his family under 85 days in each tax year in which the day of severance applies until the year before the year of return to Israel.
  • The employee submits tax returns and or is deducted from his income tax in the same country
  • The employee reported material changes that occurred in his condition (as an eligible foreign worker during the period he was abroad)
  • The employee will have to file tax returns in Israel and the appendices to the decision each year

Read here the Taxation resolution 2519/17 as published by the Tax Authority –

Residency of diplomats sent on behalf of the state and their families

  • Section 1 of the Income Tax Ordinance and regulations determines who is a resident of Israel as well as exceptions to the definition.
  • This includes diplomats sent on behalf of the State of Israel to stay abroad; it has been determined that even though they do meet the terms of the test of residency, they shall still be considered a resident of Israel.
  • In terms of the diplomat’s family, it has been determined that they will not be considered residents of Israel, therefore it would seem that the legislature fails to take into account the much-needed element of practicality.

It seems that the legislature does understand that the status of the diplomat’s family must be taken into account, since it did so in the matter of foreign diplomats. If so, it can be assumed that the legislature does not want to set rivets regarding the spouse of an Israeli diplomat, since, when examining the severance of residency resulting from a diplomatic mission, the case and its special circumstances must be mapped, and the most appropriate tax planning tailored to each case.

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