A new Supreme Court decision (Unknown v. Ashkelon Income Tax Assessor Officer – 22.07.2017) deals with the question of the residence of an individual and the issues relating to the determination of the “centre of life” of an individual. This Supreme Court ruling may have a significant implication on the determination of an individual’s tax residence under Israeli tax law.
- The facts underlying the Decision
A taxpayer born outside of Israel made Aliya, when he was 11 years old. He was married and had four children in Israel. Until 1991 he was employed and had investments in Israel. From 1992 on, most of his business activities were outside of Israel. His wife and children remained in Israel during all these years. He financed the family and the home in Israel and spent some weekends and holidays with his family in Israel. Despite being married he had relationships with other women outside of Israel, where his other businesses were located. The tax authority and the District court regarded him as Israeli tax resident. He filed an appeal to the Supreme Court claiming that he was not an Israel tax resident. The Supreme Court rejected the appeal and upheld the District Court’s ruling. This Supreme Court decision compromises some significant issues which may have an implication on the determination of an individual’s tax residence in Israel.
- Income Tax Ordinance for the Determination of a Person’s Tax Residence
An individual is considered an Israeli tax residence if his/her centre of life is in Israel. The Israeli Income Tax Ordinance lists various criteria (like the location of a permanent home, the place of residence of the individual and his family, the place where the individual regularly works, the location of the active and vital economic interests and the place where the individual is active in various organizations, associations or institutions) to be taken into account in order to determine whether a person has his/her centre of life in Israel.
In addition, the Israeli Income Tax Ordinance provides for two rebuttable presumptions for determining Israeli tax residence, based on the number of days the individual is present in Israel. According to the first presumption a person is presumed to be Israeli tax resident, if he/she resides in Israel 183 days or more per year. According to the second presumption a person is presumed Israeli tax resident, if he/she cumulative resides in the current year at least 30 days and in the two preceding years 425 days in Israel.
The new Supreme Court decision relates to the questions and issues with respect to the determination of the centre of life of an individual.
- Presumption of Residence according to Day-Counts and the Calculation of Days
In the Supreme Court decision it was obvious that the taxpayer did not spend 183 days or more in Israel, so that the court only examined the second aforementioned presumption. In calculating the number of days the Income Tax Ordinance defines a “day” as including a “part of a day”. The Supreme Court then addressed the question how the entrance day and exit day should be calculated if the individual did not stay a full day in Israel on the respective entrance- and exit days. The Court as the Tax Authority held that the entrance day and the exit day are counted as two separate days. The Court found that the Income Tax Ordinance expressly stated that a part of a day is considered a full day and concluded that if the legislator had wanted that the entrance- and exit day should be counted as one day he would have expressly stated so in the Income Tax Ordinance.
As a result of this conclusion and the way of counting the days, the taxpayer has been presumed resident in Israel under the second statutory presumption and the burden of proof to refute this presumption has been shifted to the taxpayer. Finally, the District Court and the Supreme Court concluded that the taxpayer did not meet his burden of proof. In its comments and remarks the court addressed the following issues in determining an individual’s tax residence in Israel.
- Permanent Abode in Israel
The Court emphasized the importance of a permanent home in Israel which is available to the individual for the determination of tax residence. The Court concluded that the taxpayer had a permanent abode in Israel, where he stayed during the holidays and on weekends, despite the fact that the taxpayer also had several homes in different countries. In addition the court gave weight to the fact, that the taxpayer financed the home and the family in Israel.
- Family Residence
The family of the respective taxpayer resided during all tax years in Israel. In another Supreme Court decision from the year 2014 (hereinafter called: the Sapir case) the Court stated that usually the centre of life of an individual and his permanent abode are situated where his family resides. However, the court continued, reality dictates that there are married couples that chose to live separately. As a result the court accepted the possibility of split residence with respect to spouses and children in the Sapir case. In the present Supreme Court case, the Court ruled that despite the claim of the taxpayer that his marriage in Israel was purely for formal purposes and that he had relationships with other women in the country of his businesses, the fact that he did not divorce his wife out of respect for his family and children as well as for his community showed and indicates his strong affinity to Israel. The ruling of the Supreme Court does not contradict the Sapir case, however shows that in every particular case all facts and circumstances of the taxpayer have to be examined in depth, when determining the tax residence of an individual.
- Additional Citizenship and Tax Status
The fact that the taxpayer did not have any another citizenship, except the Israeli citizenship or any other status in a foreign country had a detrimental effect on the claim of the taxpayer that he is not an Israeli resident. With respect to the non-payment of tax in another country the Court concluded that this non-payment itself cannot be considered proof that the taxpayer is an Israeli tax resident, however the fact that he did not pay taxes elsewhere weakens his claim that his centre of life is outside of Israel.
- Business and Economic Interests in Israel
The court further examined the business and economic interests of the taxpayer in Israel and concluded that the taxpayer held various investments in Israel amounting to tens of millions of NIS, including in securities of Israeli corporations, Israeli real estate and Israeli bank accounts. The fact that the major portion of his business has been conducted outside of Israel and that his investments in Israel were immaterial compared to his foreign investments, seemed to have been irrelevant for the court. Instead, the court concluded that since the taxpayer had significant economic interests in Israel he did not meet his burden of proof that his centre of life was not in Israel.
- Definition of the Term “Foreign Resident”
The court also addressed the issue of the definition of a “foreign resident”. The term is defined in the Israeli Income Tax Ordinance. According to this definition a person is a “foreign resident”, if he is not an Israeli tax resident or positively defined a person, who is not in Israel 183 days or more in the respective tax year and his centre of life is not in Israel. The court stated expressly that a person who is considered Israeli tax resident is an Israeli tax resident and cannot be considered a foreign resident even if the person meets all conditions and requirements contained in the definition of a foreign resident.
- “Returning Resident”
Finally, the taxpayer filed a request (Supreme Court: Unknown v. Ashkelon Income Tax Assessor Officer – 27.7.2017) for an additional hearing at the Supreme Court asking that he is considered at least a returning resident in Israel and receive certain tax benefits granted to a returning resident. The claim was based on the circumstance that the taxpayer’s assessment in previous years, where he filed the tax return as a foreign resident has been prescribed. The taxpayer argued that as a result of the prescription it is established that he has been a “foreign resident” in previous tax years (and that his fact should be recognized for future assessment) with the result that he is now to be considered a “returning resident” and eligible to the various tax benefits associated with a “returning resident”. The Court dismissed this argument. It stated that the fact that the previous assessments are final because of prescription does not make the person a “foreign resident” because the assessments are merely based on the self-declaration of the taxpayer without further examination by the assessing tax officer or without affirmative determination about the tax status of the taxpayer. The request for an additional hearing was rejected.
The Supreme Court decision is significant since it addresses several essential issues with respect to the determination of the tax residence of an individual. The court attaches great weight to the number of days present in Israel and then shifts the burden of prove to the taxpayer. Furthermore the court emphasizes the importance of the permanent abode of the individual and the residence of his nuclear family, as well as his economic interests and the ownership of other citizenships in order to determine the centre of life of a person. In summary, this Supreme Court decision contributes to a better understanding and application of the “centre of life” test as it is contained in the Israeli Income Tax Ordinance for the determination of an individual’s tax residence in Israel.