Tax Law Amendment Requires Some Israelis Working Abroad to File Back Home

Israelis who spend a good part of the year abroad and earn their money there have long been under the taxman’s radar. So long as they didn’t regard themselves as an Israeli resident for tax purposes, they had no need to report their income or pay taxes to the Israel Tax Authority.

That is changing after the Knesset last week approved an amendment to the tax law.

The amended law says that even Israelis who doesn’t regard themselves as an Israeli resident for tax purposes but spend considerable time in Israel – either because they have family in the country or their work requires frequent return trips – will now have to file a tax report, starting this year.

The report will have to disclose any income generated in Israel as well as explain why he or she should not be considered by law as an Israeli resident and have to present documentation to back the claim.

This will mean a big change for thousands of Israelis who work abroad because their employer has relocated them there or new immigrants who continue to hold down jobs in their home countries. In fact, the law applies retroactively, but because of a manpower shortage, experts said the Tax Authority is likely to enforce the law randomly or by rules yet to be established.

Until now, Israelis working abroad slipped past the taxman’s guard because they typically earn no income in Israel. Since a shakeup of the tax system in 2003, Israeli taxes are no longer imposed on a “territorial” basis, i.e., where the taxpayer lives, but on a “personal” basis. That means Israeli taxpayers are liable for tax on income they earned anywhere in the world.

Under Israeli tax rules, people are regarded as Israeli residents only if they meet one of two criteria that makes Israel the “center of their life” for tax purposes.

One defines a resident as someone who is in Israel more than half the year, or 183 days (or other complicated variations on this quantitative measure). Another one looks at fuzzier standards like where the taxpayer’s spouse and children live as well as business and community connections.

Noa Lev Goldstein, a tax attorney with the Herzliya firm Eitan, Mehulal & Sadot, said the amendment is problematic because it imposes “Israeli resident” requirements on someone who is not.

“But the biggest problem in the amendment is the depth of reporting individuals are being asked to make,” she said. “While, the requirement to file a tax report and note the number of days you spend abroad can be seen as relatively ‘reasonable’ the matter of having to present documents and demonstrate the basis for the taxpayer’s claim isn’t logical — it’s excessive.”

A spokesman for the Tax Authority defended the amendment. “It is fair and balanced legislation that will enable the Tax Authority to examine the relevant facts and make the tax burden more fair,” he said.

In fact, Lev Goldstein was the attorney whose successful defense of businessman Michael Sapir prompted the government to amend the law.

Sapir, who had been living in Singapore for a decade, was a frequent visitor to Israel – coming an average of three weeks eight or nine times a year, putting him above the minimum — because his family remained in Israel. As a result, the Israel Tax Authority demanded he pay tax as an Israeli resident.

But in a decision two years ago the High Court of Justice accepted that the number of days he spent in Israel wasn’t sufficient to make him an Israeli resident, nor was the fact that his family lived in Israel. It accepted Sapir’s contention that the center of his life was not in Israel.

The May 2014 decision caused many lawyers to advise clients in the same situation as Sapir. In response, the Tax Authority decided on the new rules, so that Israelis like Sapir who aren’t in Israel the minimum number of days to be regarded as an Israeli resident will still have to at least file a tax report.

Lev Goldstein said that the question of where a taxpayer lives can be complicated and involves a lot of factors, including a variety of objective and subjective factors. “It’s unreasonable to expect a taxpayer, whether he is an Israeli resident or not, to lay out all facts and attach all the references proving the place of residence is abroad,” she said.