About a year ago, an amendment was made to the Tax Ordinance, stating that an individual claiming he is not an Israeli resident, even though the ‘substantial presence test’ applies to him, will be obligated to submit a detailed report indicating the facts on which his claim to non-Israeli residency is based, and with the documents supporting his claim attached. The amendment applies to the tax years 2016 and on.
The amendment thus applies to individuals who have spent 183 days or more in Israel during the tax year, or 30 days or more when in the same year, together with the two previous years, has spent 425 days or more in Israel, and claim to have severed their residency for tax purposes (and as such, not obligated to file tax returns in Israel).
In practice, the amendment may also apply to Israeli residents who have left Israel and moved to another country even before 2016; we shall illustrate this with the following numerical example:
Nir left Israel and moved to the United States in April 2015. The number of days Nir spent in Israel were: 2014 – 300; 2015 – 100; 2016 – 40; 2017 – 185.
The amendment came into effect, as stated above, on January 1, 2016; hence, we shall check the data from this year. In 2016, Nir will have passed the quota of 425 days in Israel; hence, the amendment will apply to him, and obligate him to file a detailed return for 2016. In 2017, Nir spent over 183 days in Israel; hence, he will be required to the submit a detailed report for this year too.
It should be noted that the definition of an Israeli resident denotes “days”, including part of a day; i.e. part of a day is counted as a full day in Israel. The Supreme Court has recently adopted this rule, stating that counting part of a day as a “day” with respect to the Tax Ordinance is a legal fiction aimed at achieving a desired legal result and, among other things, avoiding disputes.
It is not clear if and when the Tax Authority will publish a special application form for submitting a detailed report that includes, as stated, as the section is worded: “a report detailing the facts on which his claim only is based, and with documents supporting his claim attached, if such exist…” It should be noted that submitting a detailed report does not exempt the individual from submitting annual tax returns as a foreign resident, if he had taxable income during the tax year produced or accrued in Israel, from which full tax had not been deducted.
We should note that prior to the amendment, individuals who left Israel and were not obligated to submit annual tax returns could, in effect, avoid reporting the very fact of having emigrated from Israel and postpone the whole matter of their absence until returning to Israel, if at all. Submitting a detailed report, in wake of the amendment, will raise the question of residence during the years after departure too, and provide the tax authorities with important information including the matter of “exit tax”. Thus, if the “quota of days” shall apply and the individual makes a claim of severed residence, then the individual’s main affinities should be examined, and a report compiled in an appropriate and professional manner. A correct submission of the detailed report may establish the claim of severed residence, and even give the authorities a “declaration” of the day of severance. Failure to submit a report at all may leave the individual’s status as an Israeli resident, i.e., will in certain cases incur income tax, national insurance and health tax liability on income from outside of Israel as an Israeli resident, and could even give rise to criminal liability for failure to report.
To conclude, until the amendment, individuals who relocated remained in certain cases ‘under the radar’ of the Israeli tax authorities. In wake of the amendment, a declaration to the authorities in the form of a detailed report is required.