By KTA News Team |

In a bid to redefine tax residency for individual income tax purposes, Israel’s Ministry of Justice has issued a draft Bill, proposing significant changes. Under the current system, as determined by the Income Tax Ordinance 5721-1961 (the Ordinance), tax residency is gauged by whether an individual’s ‘centre of life’ is in Israel, akin to the ‘place of vital interests test’ in bilateral tax treaties.

A rebuttable presumption makes someone an Israeli resident if they’ve lived in Israel for a minimum of 183 days in the applicable tax year or for at least 30 days within the tax year, along with a total of 425 days across a three-year span.

The Ordinance further defines a ‘foreign resident’ as an individual who is not an Israeli resident, or someone who has remained outside of Israel for 183 days or more during the tax year and the following tax year, while their ‘centre of life’ was overseas during the next two years.

MAny argues that the current law see previous post, is ambiguous and broad nature of the ‘centre of life’ test has caused uncertainty, resulting in difficulties in enforcement and disputes between taxpayers and tax authorities. Current law also raise the risk of taxpayers opting for aggressive tax reporting stances to exploit potential tax benefits.

The proposed Bill suggests de-emphasizing the ‘centre of life’ test to an ancillary role, replacing it with a primary test based on a set of incontrovertible presumptions of tax residency, mainly revolving around the number of days spent in Israel.

These presumptions include: spending 183 days in Israel within any two-year period; spending 100 days in Israel during the tax year and 450 days across three tax years, with an exception for residence in a ‘reciprocal country’; or spending 100 days in Israel during the year while having a spouse with Israeli residency.

The Bill also introduces conditions that categorize certain individuals as foreign residents regardless of ‘centre of life’ factors. Notably, it allows for individuals to be tax-residents for part of the year and non-residents for another part of the same year.

These proposals originate from the recommendations of the Committee to Reform International Taxation, established in September 2021. The Committee comprises representatives from the Israel Tax Authority, the Institute of Certified Public Accountants, and the Israeli Bar.

The public is invited to submit comments on the proposed changes until 8 August 2023.