Your Taxes: Tough new fiscal residency proposals

People who take frequent vacations in Israel are more likely to become fiscally resident in Israel under the new proposals.

It is proposed that 75 days in Israel any year may soon make someone an Israeli resident – or even a mere 30 days for couples – subject to a further review over five years according to a formula.

There is a rebuttable presumption of residency if the individual spends at least 183 days in Israel in any tax year, i.e., calendar year, or 425 days over three years with at least 30 of those days in the latest year.

It is proposed to drop the rebuttable presumption, as it causes uncertainty.

Under the proposals, individuals would automatically be considered resident in Israel if their “weighted” number of days in Israel over five years exceeds a prescribed number, OR if their center of living is in Israel.

If the year in question is year 0, the five-year review period would be years -2, -1, 0, +1, and +2.

The threshold number of days would involve the following steps:

Step 1: Calculate ‘weighted days’

Multiply the number of days in Israel by the following weightings: 1/6 in year -2, 1/3 in year -1, 100% in year 0, 1/3 in year +1, 1/6 in year +2.

For example, if the taxpayer spent 140 days in Israel in year -2, multiplying that by 1/6 gives 23.33 “weighted days” for that year, and so on.

Step 2: Add up the weighted number of days

This is done for the three three-year periods: (a) starting year -2, (b) starting year -1, (c) starting year 0.

Step 3: Check if deemed Israeli resident in year 0

No. 1: present in Israel year 0 for at least 75 days AND 183 “weighted days” in any of the three-year periods in step 2.

No. 2: present in Israel for at least 30 days in year 0, AND 140 “weighted days” in any of the three-year periods in step 2, AND your spouse is also resident in year 0.

A spouse is a married couple or a couple publicly known to be living together.

These proposals are ridiculously complex and highly detrimental to couples. We crunched the numbers and found that a lone individual can spend a steady 109 days per year in Israel without becoming fiscally resident in Israel under the proposals – but only 83 days for a couple.

And possibility No. 2 may trigger a catch-22 vicious circle if each spouse’s residency depends on the residency of the other spouse.

Should couples separate? The proposals are silent on separation.

What about tax treaties? Israel has tax treaties with about 60 countries. Each one contains “tiebreaker” rules that kick in if someone is resident in both countries, but they vary considerably.

Year of arrival: In the year of arrival, residency would begin on the day of arrival, not January 1 under these proposals. Visits of up to 21 days should not trigger residency.

Leaving Israel: Under the proposals, people leaving Israel for good or for relocation may stop being fiscally resident in Israel if they spend no more than 74 days in Israel in the year concerned (year 0) and no more than 110 “weighted days” in each of the above three-year periods, starting in year -2, year -1, or year 0.

For couples, no more than 90 days in Israel in the year concerned (year 0), and no more than 125 “weighted days” in each of the above three-year periods. The “center of living” rules would no longer apply to leavers under these proposals. But the existing “exit tax” would continue.

The marriage penalty hardly seems to be sound public policy. Some may question why bother amending the present law?

As always, consult experienced tax advisers in each country at an early stage in specific cases.