International taxation - Change in Israel Tax Authority’s position – taxation of foreign income in the hands of a returning resident – shall be taxed on a cash basis

On December 2016, a non-consensual tax-ruling No. 2873/16 was published, dealing in taxation of income produced when the individual was a foreign resident and received when he became an Israeli resident again.

The individual was a resident of Israel until 2006 and worked as an employee in a series of senior positions in an Israeli company.
During this year, the individual and his family (including minor children) relocated to the USA and the individual began working in an American related company. From the time of relocation, the individual and his wife are considered US residents for tax purposes, and file their returns accordingly.
On January 2011 the individual was offered a senior position in an Israeli company. Hence, the individual left his job in the US and returned to Israel on his own (his wife and children remained in the US) in order to work for the Israeli company. The individual rented an apartment in Israel, in which he lived until September 2012, when he moved to an apartment he bought in May 2011.
Over 2011-2012, the individual received income from salary differences, redemption of vacation days, and additional accompanying income from the American company (“the Compensation”) with respect to his period of employment in the USA.
It was decided that the individual shall be considered a foreign resident from January 2007 until December 2010 and from the day of his return shall be considered an Israeli resident and be entitled to the benefits of a “regular returning resident”.
It was further decided that based on the Israeli tax laws, employees shall report their income on a cash basis i.e., on the date of actual receiving the income. Since the individual received compensation at the time he was an Israeli resident (according to the Tax Authority’s approach), it has been determined that this compensation is taxable as Salary income!
By this decision, the Tax Authority has overturned its decision No. 22/2006 from June 2006 which determined an identical issue of receipt of compensation from a former employer abroad by a person who had just become an Israeli resident.

In a decision from 2006 it was determined that if an applicant shall prove that the compensation was given with respect to his period of work abroad, before becoming and Israeli resident, the applicant will not be taxed in Israel for the compensation received.

In our opinion, as interpreted by the Tax Authority in similar cases in the past, and to the extent that this is a published position of the Tax Authority (followed by many taxpayers) it is appropriate that the change in position apply from the day it’s issued and onward and not retroactively.