As part of the provisions of the Law to Amend the Income Tax Ordinance (No. 168 and Temporary Order), 5768-2008 (hereinafter: the "Amendment"), the definition of "foreign resident" was updated, inter alia. While prior to the aforementioned amendment, "foreign resident" was defined in a residual definition as "a person who is not an Israeli resident", following the amendment the definition of "foreign resident" was expanded to state that:
"'Foreign resident' means a person who is not a resident of Israel as well as an individual in whom all of the following have been fulfilled:
(a) he resided outside of Israel for at least 183 days, each year, in the tax year and the following tax year;
(b) the center of his life was not in Israel, as stated in paragraph (a)(1) of the definition of 'resident of Israel' or 'resident', during the two tax years following the tax years mentioned in subparagraph (a);"
In other words, the new definition states that in order to examine whether an individual is considered a "foreign resident," two issues must be examined:
One is whether that individual is not considered an "Israeli resident";
The other is whether the individual meets the second test, which in fact includes a four-year test: in the first two years – a technical examination of the days spent in Israel, and in the next two years – a qualitative-substantive examination of the center of life of that individual in accordance with the definition of "Israeli resident" in section 1 of the Income Tax Ordinance (New Version), 5721-1961 (hereinafter: the "Ordinance").
With regard to this definition, it is necessary to examine whether, in order to meet the definition of "foreign resident", both tests must be met, or whether passing one of the tests may meet this definition, in light of the connection in the word "and" (an individual in which all of these have been met)..."
In any case, both from the wording of the definition of "foreign resident" and from informal conversations with Tax Authority officials, there may be cases in which the severance of residency will be done as a sharp act from the first day of leaving the country, contrary to the Tax Authority's position and the rulings of the Israeli courts prior to the amendment, according to which severance of residency is an ongoing procedure.
However, according to the aforementioned definition of "foreign resident", the four-year test can only be done retroactively. Hence, apparently, the Tax Authority's requirement to examine the taxpayer's status only after four years and the requirement to file reports in the coming years as well.
Due to the fact that the amendment is relatively new, no accepted practice has yet accumulated in this matter, and no decision has yet been published by the Tax Authority regarding the date of severance of residency from Israel. However, it should be noted that the Tax Authority is expected to issue a circular that includes various clarifications regarding the amendment, and it is possible that this circular will also provide clarifications regarding the matter.
In addition, it should be remembered that the status of an individual in Israel for tax purposes must be determined both according to the provisions of Israeli law and according to the provisions of a relevant tax treaty. Insofar as an individual is considered a resident of the country to which he moved, it may be possible to define him as a non-resident of Israel for the purposes of the provisions of the Convention, and therefore he – although it is not possible to determine that he is not a resident of Israel in accordance with the provisions of internal Israeli law, the Convention may protect him. In the case described in the question, the transfer of that individual is to a country that is not a treaty country, and therefore there is no double taxation treaty to protect him.
It should be noted that to the extent that an individual is considered an Israeli resident for tax purposes, it will be possible to deduct against his taxable income for tax purposes in Israel various expenses incurred in the production of his taxable income, including: per diem expenses, lodging, flights, etc., all in accordance with the provisions of the Income Tax Regulations (Deduction of Certain Expenses), 5732-1972. It will also be possible to receive a credit for taxes paid abroad on his taxable income, in accordance with the provisions of the Ordinance regarding credit from foreign taxes.
Regarding National Insurance payments, we note that Regulation 20 of the National Insurance Regulations (Special Provisions Regarding Payment of Insurance Contributions), 5731-1971, provides for policyholders residing abroad as follows:
"(a) Insured, except... A person who resides abroad for a period exceeding six consecutive months shall pay insurance premiums for the entire period of his stay abroad at the rates applicable to an insured person who does not work and is not self-employed, from his income that is liable to pay insurance premiums... And if he has no such income or his income does not reach the minimum income... shall pay insurance premiums as if his income were the minimum income as stated."
Section 345 of the National Insurance Law (Combined Version), 5755-1995 provides as follows:
"Self-employed... A person who is not employed and who is not self-employed shall be deemed as his annual income his income from the sources specified in said section 2...
... The income in the current year shall be determined according to the final assessment of such income... According to the Income Tax Ordinance..."
This means that an individual resident of Israel who resides outside of Israel for an extended period of at least six months will pay National Insurance contributions according to the rates applicable to those who do not work and are not self-employed. The calculation of National Insurance contributions will be done in accordance with the taxable income as labor income for income tax. If such an individual does not have taxable income in Israel, then he will pay the minimum National Insurance contributions. Therefore, To the extent that the income of that individual will be taxable in Israel, this may also have significance in National Insurance contributions. However, it should be noted that in practice there is not always a correlation between the Tax Authority's determination regarding income taxable to income tax and the National Insurance Institute (hereinafter: "the NSC").
To date, the State of Israel is a signatory to about twenty social security conventions that regulate the obligation to pay National Insurance contributions while working outside of Israel, as well as insurance coverage. The Conventions differ from each other, and each case must be examined on its own merits in accordance with the provisions of the Convention. In this regard, we note three comments:
Such conventions relate only to the National Insurance component, but at the same time it is required to regulate the payment of health insurance premiums in Israel.
The NSC has an external relations department that answers questions by phone regarding social security treaties and everything related to it. It is possible to consult with it regarding all aspects of social security when traveling to countries that are signatories to such a treaty with Israel, as well as regarding return from these countries.
There is not necessarily a correlation between treaties for the prevention of double taxation and treaties for social security. In other words, it is possible that Israel is a signatory to a tax treaty with a certain country for the prevention of double taxation, but is not a signatory to a social security treaty with it, and vice versa – it is possible that there is a social security treaty with a certain country, but there is no double taxation treaty with it.
Of course, the obligation to pay National Insurance contributions in Israel is in accordance with the NSC's determination, according to which the individual is considered an Israeli resident for the purposes of the NSC. Such a determination is not necessarily made according to rules identical to those accepted by the Tax Authority. It is possible that the NSC will cease to regard that individual as insured due to his non-stay in Israel, and as a result such an individual will not be required to pay National Insurance contributions, but on the other hand will cease to be insured by the NSC, except in cases where the Social Security Convention determines otherwise.
Respondents - accountants and business consultants
