A ruling was recently published by the Supreme Court, in the Rafi Amit case, which approved the ruling that had been handed down by the District Court. The ruling dealt with two central issues – the first of which was the matter of residency for tax purposes, which we will discuss in this bulletin and the second of which is the issue of the classification of revenues from the winnings in poker games.
The ruling in the district court determined that the appellant is deemed to be resident in Israel in the 2007 tax year, which is the subject matter of the appeal, even though he was only there for 30 days, which was primarily because of his various connections to Israel (including an active bank account in which the monies from the winnings were deposited), the fact that he stayed for many days in the years before and after the tax year that is the subject of the appeal and also because of the fact that he did not determine residency in any other place in the world. We would mention on this matter that the “substantial staying” assumption for the determination of residency in Israel (which is 183 or more days in the tax year, or alternatively a stay of 30 days in the tax year and 425 days cumulatively in the tax year and in the preceding two years), is a positive assumption, in other words, if met, the assumption is that the assessee is a resident of Israel (and a burden of proof will be imposed upon him to prove otherwise), whereas if they are not met, there is no reverse assumption in accordance with which he is assumed to be a foreign resident. Furthermore, in the circumstances of the case, the existence of an active bank account in Israel may constitute a relevant and significant index in the determination of residency (a criterion the importance of which it is usual to make little of in practice).
As mentioned above, the ruling in the Supreme Court confirms the determination by the District Court on the subject of residency. The following is a brief description of the significant insights (which some may call worrying) on the subject of residency:
The issue of the absence of general residency, has also been brought up in the ruling by the Supreme Court, which on the one hand did not rule out the possibility of the existence of this situation (that an individual will not be a resident in any country) and it mentions that “Attention is drawn to the fact that the Ordinance does not determine that a person must be resident in any country whatsoever. However the lights are now shining on the question of whether he is a resident of Israel“, however, this is a parameter that is absolutely relevant in the examination of the existence of Israel residency, and as Judge Hendel stated: “an approach to another country in which the assessee claims that he was resident in the tax year, is a characteristic that is relevant within the framework of the overall examination of the center of his life”.
An interesting and far-reaching statement was made by the Judge on the subject of “retention of Israeli residency” as the default choice. According to him: “Whoever is a citizen and resident of Israel – and especially whoever was born and grew up in Israel – and has gone abroad, the starting point is that he remains a resident of Israel, even if he stays for continuing periods of time outside of Israel“. The Judge further determines that the breaking off of residency may only occur if activities are performed evidencing a subjective intention to break off residency – such as, for example “a waiver of citizenship” and “the sale of his house and his assets in Israel“.
In our opinion, it is appropriate and correct to examine the issue of residency separately from “the assessee’s Israeli past” and there is no room for implementing the “umbilical cord” approach, which draws back and retains the Israeli residency of someone whose origins are in Israel. The Judge’s comments that “in the current global reality, the phenomena of continuing stays outside of the country for various needs, such as for the purposes of academic studies or for work (generally in international companies) is common, and may lead to a conclusion that the moving of fiscal residency is easier in the present era since things are more accessible and more acceptable, and it should not be concluded from this that today even a long stay abroad does not break off the Israeli residency.
The Judge’s “recommendation” to waive the Israeli citizenship as a condition for the breaking off of residency is slightly surprising, since citizenship does not constitute a criterion in the array of the types of connections that indicate “a center of life”, pursuant to the definition of “resident” in the Income Tax Ordinance and in the tax treaties, the citizenship status is the last in a list of criteria for tests for breaking a tie. Furthermore, a recommendation to sell the house and the assets of someone who goes abroad does not fit with other rulings on the subject of residency since the existence of a house and assets constitute a single criterion out of many criteria in the center of life test, all the more so when they were bought by the assessee a very long time before he left Israel. We would mention on this matter that the “fixed home” test, which is implemented in the tax treaties, it is only required that this house will not be available and adapted for the assessee’s residence and its sale is not be required of course. It would seem that the importance of the subjective test (the assessee’s intention) receives extra importance in the judgment, and this test, the status of which has been reduced and restricted in the latest rulings, has come back to life. The question that needs to be asked, of course, will be whether the same criteria and interpretation is to be used for someone who comes to Israel for a period of several years for a defined objective without asking for Israeli citizenship and without him having sold his assets in the foreign country from which he came, will that individual then be considered to be a foreign resident?
At the end of the day, it would seem that the legal conclusion in accordance with which the appellant remains a resident of Israel in the tax year, rests to a considerable degree on the absence of the status of residency in another country, and in recent years, the correct advice that has been given to someone wishing to break off their Israeli residency is first of all to determine fiscal residency in another place and not to retain a lack of residency. Confirmation of residency from the foreign country is required, for example, within the framework of the declaration of Israeli residency that is submitted in certain cases in relation to someone who claims that he is a foreign resident. This statement, in respect of the substance of the residency in another country test, constitutes a continuation of a trend that has found expression in other rulings as well. We would mention that residency in another country has decisive importance where the individual is resident in a treaty country and he claims foreign residency in Israel not only under the force of the provisions of the Ordinance and also under the force of the tie-breakers in a treaty.