Home is where the heart is?

Posted on December 2019

Potential new Israeli residency rules

Israeli press recently released information about a proposal for a new Israeli residency test which has provoked a negative reaction from Israeli tax professionals. The Israeli tax professionals fear that the test is too stringent and its consequences will impact on the ‘innocent bystanders’. This article discusses some of these new rules and compares and contrasts these rules to the existing UK residency test.

UK Rules

The UK introduced a statutory residence test from 6 April 2013. The purpose of this test is to remove uncertainty for taxpayers as to whether they are UK resident or not. Previously, UK residency was based on case law and HM Revenue & Customs (“HMRC”) guidance which sometimes left residency positions open to interpretation. UK residents are taxed on their worldwide income and gains (unless they are non-UK domiciled which can complicated their UK tax position further); whilst non-UK resident are only taxed on UK-sourced income and gains. New arrivers to the UK and leavers from the UK ought to clarify their tax residency position as this will impact where and how much tax they pay.

Taxpayers spending less than 16 days in the UK will automatically deemed to be non-UK resident. Conversely, taxpayers spending at least 183 days in the UK will automatically be deemed to be UK resident. Most taxpayers are likely to fall somewhere in the middle of these limits and will need to determine how many ‘ties’ they have to the UK and the precise number of days spent in the UK to determine their residency position. The logic behind this is that the more ties you have to the UK (for example, available accommodation, work and family), the more time you need to spend outside of the UK to be deemed non-UK resident.

Israeli rules

Generally, someone who is in Israel for at least 183 days is likely to be considered Israeli tax resident. A person who spends 30 or more days in Israel in one tax year (and 425 days or more in the tax year and the two years preceding it) is also an Israeli resident for tax purposes. In Israel the current test for residency also relates to where a taxpayer’s ‘centre of life’ is. This test takes into consideration factors such as the location of the person’s permanent home, the residency of the taxpayer’s family, their place of work and other social and economic links to the country.

The ‘centre of life’ test for Israeli residency can be a subjective test and has led to a number of high-profile court cases in Israel to determine residency. The most famous case which is still at the Israeli Supreme Court is the case of the model Bar Refaeli where potential Israeli tax on NIS 16 million of overseas income hangs in the balance. The crux of the case is whether Bar Refaeli was Israeli resident or not at the time. Another very interesting case relates to Rafi Amit who won over USD 1 million in an overseas poker game. The Israeli Tax Authority deemed him to be Israeli resident and therefore this income should have been subject to Israeli tax, albeit he was in Israel for less than 30 days and did not have a permanent home in Israel.

Potential Change

The Israeli Tax Authority is now seeking to amend the Israeli residency rules to bring about certainty and to reduce the scope for tax evasion. We summarise below some of the proposed reform but it is important to note that the reform is not in place and of course must be approved by the Israeli Tax Authority Director as well as the Israeli government – when and to what extent these reforms will be adopted remains to be seen.

The proposed reform will dictate that a person who resides over 183 days in Israel is Israeli resident irrespective of where they consider their ‘centre of life’ to be. The proposal also includes that a person who spends 60 or more days in Israel in one tax year and 450 days or more in the tax year and the two years preceding it is also an Israeli resident for tax purposes. The key change here is to focus purely on the number of days spent in Israel and not taking into account any other factors.

The proposed reform will also impact on situations where one spouse relocates overseas and the other spouse remains in Israel. The reform suggests that if a taxpayer relocates overseas and the spouse remains in Israel, the taxpayer will be deemed Israeli tax resident if they spend at least 90 days in Israel. This change really embraces the saying of ‘home is where the heart is’ as it does not recognise separate residency within a family. It will impact on a large number of Israelis travelling overseas to work for set periods of time. Relocations for work bring about a number of legal and tax challenges.

The proposal also seeks to change the requirements for foreign residents. Taxpayers spending less than 60 days a year in Israel for 3 consecutive years will be considered as foreign-residents. Those spending more than 60 days a year in Israel for 3 consecutive years may inadvertently find their tax residency in question.

Conclusions

Juggling family, work, holidays and finances is difficult and can impact on how much time taxpayers spend in different jurisdictions. The proposed reforms for the Israeli residency test may or may not be adopted but seem to focus heavily on the notion of ‘home is where the heart is’. We recommend that you review your affairs and take professional advice prior to relocations or spending significant time abroad.

Claire Shelemay, BFP FCA is the founder and CEO of CrownStone Consulting Ltd - a UK tax boutique in Tel Aviv. Her expertise relates to solving UK tax issues, UK tax dispute resolution and UK/Israel consultancy services. Her contact details: +972-58-795-3599 / +44-7854-904554 / claire.shelemay@crownstone.co.uk