A legal memorandum has been published defining clear cases in which it can be determined whether an individual is an Israeli resident or a foreign resident for tax purposes.

The Tax Authority published today (Wednesday) for public comment a memorandum of law that establishes criteria by which it will determine whether an individual is an Israeli resident or a foreign resident, primarily based on the number of days spent in Israel, without the need to examine all of his family, economic and social ties. The purpose of the law is to increase certainty regarding the determination of residency for tax purposes, reduce friction between the Tax Authority and taxpayers and their representatives, and reduce the damage to the state treasury as a result of tax planning.

According to the Income Tax Ordinance, Israeli residents are required to pay income tax in Israel on all of their worldwide income, while foreign residents are required to pay tax in Israel only on income that is sourced in Israel. Given this, the determination that a person is a resident of Israel is very significant. Today, an individual is considered a resident of Israel if his “center of life” is in Israel. In examining the location of an individual’s “center of life,” various qualitative characteristics are examined, including the location of his permanent home, his and his family’s place of residence, his usual place of business or employment, and the center of his economic interests.

Alongside these qualitative criteria, there are also quantitative criteria relating to the number of days the individual spent in Israel during each tax year. However, the determination based on the number of days spent in Israel can be contradicted, based on the qualitative criteria of the center of life test.

About two years ago – following the recommendations of a joint committee of the Tax Authority, the State Revenue Administration, and representative organizations, which dealt with the issue of international taxation – a memorandum of law was published that did not mature into legislation, which sought to define clear cases in which counting the days of stay is sufficient for determining residency, and in which it is not necessary to examine all the other components of the center of life test to determine whether the individual was an Israeli resident or a foreign resident in that year. The current memorandum proposes a similar mechanism but establishes different assumptions that increase certainty relative to the assumptions in the previous memorandum, and leave a smaller number of cases in which it will be necessary to examine the center of life test, following a re-examination and in light of public comments.

The memorandum of the law, which details the cases in which counting the days of stay is sufficient for determining residency, is attached to this notice.