Proposal to amend the Income Tax Ordinance – Change in the definition of a resident

Now more than ever, many Israelis are considering undergoing the process of moving to work overseas. Due to the complexity of the process, it is important to carry it out with close and professional guidance in the correct manner and with precise adaptation to your personal data.

Recently, a dramatic bill regarding the amendment of the Income Tax Ordinance concerning the determination of who is an Israeli resident for tax purposes was placed on the Knesset’s table. (This bill is only the first part of a reform in international tax rules). A link to the bill’s memorandum can be found here.

Currently, according to the definitions of ‘resident’, ‘Israeli resident’, and ‘foreign resident’ in Section 1 of the Income Tax Ordinance, an individual’s residency is determined based on a qualitative test that examines, on an individual basis, the totality of their family, economic, and social ties, with the assistance of several presumptions that are open to challenge.

This situation allows many taxpayers who leave Israel, and thus are considered foreign residents from the time of departure, to have a significant tax advantage by meeting the ‘center of life’ test. When examining an individual’s center of life, various characteristics are considered including the location of their permanent home, there and their family’s place of residence, their usual place of work or employment, the center of their economic interests, and their activities in organizations, unions, or various institutions.

When a taxpayer is considered an Israeli resident due to the presumption of days, our office often succeeds in defending the taxpayer with expert opinions and determining that they are not an Israeli resident. This option is now going to be cancelled in light of the law memorandum to amend the Income Tax Ordinance that was published these days, proposing to establish several absolute presumptions mainly based on the number of days the individual and their family spend in Israel, which, if met, will regard the individual as either an Israeli resident or a foreign resident, as applicable. For this purpose, two types of absolute presumptions (which cannot be rebutted) will be established – the first type, absolute presumptions that, if met, will regard an individual as an Israeli resident, and the second type, absolute presumptions that, if met, will regard an individual as a foreign resident.

These days, a dramatic bill has been proposed to amend the Income Tax Ordinance regarding the definition of who is considered an Israeli resident for tax purposes. This proposal, one side, creates certainty for taxpayers: a person who meets the days of stay test will unequivocally fall under the law’s application without needing to examine their family, economic, and social ties. Conversely, many Israelis who previously did not meet the day-count presumption but were considered under the center of life test enjoyed significant tax benefits by not being taxed on their overseas income solely based on the center of life test. Previously, it was possible to ‘elegantly evade’ the Israeli tax net even in cases where the taxpayer spent a significant number of days in Israel; now, this presumption is irrefutable. Take, for example, a situation where a person stayed in Israel for 184 days but their family and all their business are in France, and they themselves stayed in France for 182 days. According to the law amendment, that person would be considered an Israeli resident! According to internal law in France, the authorities would claim that this person is entirely a resident of France since their center of life is in France. In such a situation, there is no choice but to refer to the tax treaty between the two countries and assess the person’s residency based on the treaty’s tie-breaker tests. It should be noted that the tax treaty overrides domestic law, so presumably, despite the complexity, there would be a solution for that resident.

The impact of the law amendment on existing legislation

This proposal, one side, creates certainty for taxpayers: a person who meets the days of stay test will unequivocally fall under the law’s application without needing to examine their family, economic, and social ties. Conversely, many Israelis who previously did not meet the day-count presumption but were considered under the center of life test enjoyed significant tax benefits by not being taxed on their overseas income solely based on the center of life test.

Previously, it was possible to ‘elegantly evade’ the Israeli tax net even in cases where the taxpayer spent a significant number of days in Israel; now, this presumption is irrefutable.

For example, a situation where a person stayed in Israel for 184 days but their family and all their business are in France, and they themselves stayed in France for 182 days. According to the law amendment, that person would be considered an Israeli resident! According to internal law in France, the authorities would claim that this person is entirely a resident of France since their center of life is in France.

In such a situation, there is no choice but to refer to the tax treaty between the two countries and assess the person’s residency based on the treaty’s tie-breaker tests. It should be noted that the tax treaty overrides domestic law, so presumably, despite the complexity, there would be a solution for that resident.

When it comes to countries with which Israel does not have a tax treaty at all, such as Cyprus, the risk of double taxation is almost certain. There is a belief that this specific legislation amendment aims to impact Israeli migration to Cyprus and make it more difficult for Israelis to move there with their families.

Many in the field believe it is no coincidence that the new legislation is being introduced close to the consequences of the governmental/judicial reform. Following the new legislation, many Israelis are considering moving to live somewhere close outside Israel and still trying to continue managing their businesses in Israel. Cyprus is a good alternative, but it does not have a tax treaty with Israel. Our office is in contact with the Treasury for the purpose of drafting a treaty to prevent double taxation and represents Cyprus in this context, but the State of Israel is not ready to advance negotiations on this issue at this stage. If the new legislation passes and the definition of residency indeed changes, it will prevent many Israelis from moving to Cyprus and still managing their businesses in Israel without encountering double taxation. Our office assesses that the legislation amendment aimed at stopping relocation to Cyprus is one of its objectives, reinforced by the existing exception in Section 1(b)(c) of the amendment, which provides significant relief to countries that have a treaty with the State of Israel.

We estimate that if the legislation passes, there will be many more cases that will reach the treaty’s tie-breaker test and the mutual agreement procedures between the countries, which will create unnecessary complexity and sometimes even real double taxation payments until the countries reach an agreement.

It is important to emphasize that this is still a bill that has not yet been legislated in the Knesset, but it is at advanced stages. Therefore, if you have already left Israel but have not yet completed the disconnection process with the relevant authorities here in Israel, such as the Income Tax Authority and the National Insurance Institute, or if you are considering leaving Israel and relocating your residence to countries outside Israel, it is advisable to handle the disconnection process with the tax authorities here in Israel before the law amending the Income Tax Ordinance (place of residence of an individual), 2023, is legislated.

Why is the timing of reporting residency termination/relocation abroad so crucial?

An Israeli resident moving to reside in another country, as long as they have not reported the residency termination to the Income Tax Authority, remains liable for tax on all their income, both in Israel and abroad. Additionally, they are eligible to deduct various withholdings from their taxable income according to the Income Tax Ordinance and claim the tax paid abroad as a credit against their tax liability in Israel. Even if someone has technically left Israel and considers themselves a foreign resident, as long as they have not reported this to the tax authorities and completed the entire disconnection process, they are exposed to taxation both in Israel and in the country, they moved to.

Conversely, if a report of residency termination is duly made, as a foreign resident, they may enjoy an exemption from reporting to the Israeli tax authorities about income earned abroad from employment. It is important to mention that before leaving Israel, it is important to seek professional advice regarding the tax implications in the country you are moving to and to understand in advance the tax implications for you and your business activities in the other country. Our office has extensive knowledge and experience as well as many collaborations with a number of countries worldwide, which is an advantage when deciding which country to move to, correctly and accurately calculating the economic and tax aspects that will apply to you.

New resident definitions:

Israeli resident – one who meets at least one of the following alternatives:

1. Someone who stayed more than 183 days in Israel and also stayed in Israel in the year after that tax year or the year before it for more than 183 days.
2. Someone who stayed more than 100 days in the tax year, and 450 days in that year and the two years preceding it combined (unless they stayed in a country that has a tax treaty with Israel for more than 183 days in each of those three years and was a resident of that country – a residency certificate from that country is required).
3. If someone stayed in Israel for more than 100 days and their spouse or partner (including common-law) meets one of the above alternatives for an Israeli resident.

In each of these alternatives – the person is considered an Israeli resident without the ability to appeal.

Foreign resident – one who meets at least one of the following alternatives:

1. Someone who was in Israel for less than 30 days (unless in the first 30 days of the first tax year being examined or the last 30 days of the last tax year being examined they stayed in Israel for 15 days or more).
2. Someone who, together with their spouse, stayed in Israel for less than 60 days in each of the tax years being examined (unless in the first 60 days of the first tax year being examined or the last 60 days of the last tax year being examined they stayed in Israel for 30 days or more).
3. Someone who, together with their spouse, stayed in Israel for less than 100 days and they are residents of a country that has a tax treaty with Israel (a residency certificate from that country is required) and stayed in it for more than 183 days (unless in the first 100 days of the first tax year being examined or the last 100 days of the last tax year being examined they stayed in Israel for 30 days or more).

For the definition of “foreign resident,” “tax years being examined” are one of the following alternatives:

1. The tax year and the three tax years following it;
2. the tax year, the tax year before it and the tax year after it;
3. the tax year and the two tax years before it.

Note that the definition of a foreign resident does not introduce anything new, as in fact, none of the taxpayers who meet these definitions would have been considered an Israeli resident even before the legislation. Thus, it is not a relief.

One refreshing change that includes the law amendment is the treatment of known partners as equal to spouses – a change that, in our opinion, should have occurred as a correction to the definition of a spouse in Section 1 of the Income Tax Ordinance.

provides full professional support for the entire disconnection process against all tax authorities and various entities to minimize tax exposures during the transition and to allow you to adjust in the destination country ‘peacefully’ and with full confidence.

Our office offers comprehensive professional assistance throughout the entire process of disconnecting from all tax authorities and related entities. This support aims to reduce tax liabilities during the transition and ensure that you can settle into your new country of residence smoothly and confidently.