On April 7, 2016 the Israeli Parliament confirmed an amendment to the Israeli Income Tax Ordinance which substantially expands the reporting obligation for individuals. The amendment includes annual reporting for individuals, who are under the numerical day-test-rule presumed to be Israeli residents, however claim that they are not, for individuals who transfer a certain sum of money outside of Israel and to Israeli beneficiaries of a trust.
In Israel, most individuals are not obligated to file an annual tax return. The new amendment now expands the scope of individual filing requirement to ascertain that the individuals report their income properly. Form the tax year 2016 onwards the following three additional categories of individuals will be required to file annual income tax returns:
Individuals who are presumed to be Israeli residents
Under Israeli Law, an individual is Israeli resident for tax purposes, if the “center of life” is in Israel. The question of tax residence is complex and to determine the “center of life” objective and subjective criteria have to be taken into account. The Israeli law creates a presumption according to which an individual is considered to have his/or her center of life in Israel, if he/she (i) is present in Israel for more than 183 days in the relevant tax year or (ii) for at least 30 days in the current tax year and cumulative 425 days in the current and the two preceding tax years. This presumption can be refuted, meaning that one can prove that the center of life is according to family links, social and economic ties not in Israel, and the individual will not be considered Israeli resident, despite the statutory presumption according to the days present in Israel.
The new amendment requires an individual who is under the numerical day test presumed to be Israeli resident to file a tax return, and specify the facts why his/her center of life is outside of Israel and provide the necessary documents on which his claim is based. The tax authority will probably publish a specific Form for this reporting requirement.
The required new reporting will not apply to the spouse of the individual and to his/her children and to any foreign employees.
This new reporting requirement for individuals – presumed to be Israeli residents – will affect especially individuals who emigrate from Israel, since they will probably meet the presumption test in the first year of their departure. To circumvent this reporting requirement the individual should emigrate at the beginning of the year and make sure he/she should not meet the presumption test. The rule will also affect foreigners, who are present in Israel for a certain amount of days and thereby presumed to be Israeli residents, despite the fact that their center of living is abroad.
Individuals who transfer a certain amount of money from Israel abroad
In addition, the amendment also requires an Israeli resident, who transfers 500,000 Shekel or more within a period of 12 months abroad from Israel, to submit an annual tax return. This requirement applies with respect to the tax year, in which the sum of money is transferred and the following tax year.
This new reporting requirement is only applicable to Israeli residents. It will affect for example individuals who emigrate from Israel, sell all their belongings and transfer the amount abroad or for example to Israeli residents, who transfer certain amount of monies to support their children abroad.
Israeli resident beneficiaries of a trust
Finally, the new amendment requires Israeli residents who are over 25 years old and beneficiaries of a trust whose value is at least 500,000 shekels in the respective tax year, to file an annual tax return, regardless whether he actually received a distribution from the trust. The annual reporting obligation is caused by the mere fact that the individual is a beneficiary in a trust, however would not apply if the individual does not know about this fact.
These new annual reporting requirements are quite significant. Especially, individuals, who have emigrated in the last couple of years or are planning to emigrate, should examine carefully their annual reporting obligations under the new amendment.