Recently, the Tax Authority has published a tax ruling and a circular on the subject of fiscal residency of an individual: a taxruling (consensual) that deals with setting of conditions for receiving a certificate of a resident of Israel for treaty purposes, and a circular that deals with the options of receiving prior approval of new immigrant or veteran returning resident status (“beneficiary individual”).

Specifics of the circular – receipt of confirmation of “beneficiary individual” status

The purpose of the circular is to provide certainty concerning the taxation status of a beneficiary individual, which is certainly necessary in view of the extensive relief that is granted to an individual of this status, mainly – an exemption from tax and from reporting concerning incomes and assets outside of Israel for 10 years. According to the apparatus that has been laid down, the applicants will be divided into two groups, in accordance with the level of affinity for Israel as a tax domicile.

Green track: For applicants who have a low level of affinity for Israel as a tax domicile. These will be dealt with at the regional office and will receive approval by shortened proceeding of their eligibility to receive the requested status. If it has been decided that an applicant’s status is not to be approved as requested, the individual may submit an application within the individual track that is set forth below.

Individual track: For applicants who have a relatively high level of affinity for Israel. Their requests will be examined individually (at the regional office in which the file is managed or supposed to be managed, or at the international taxation unit at the headquarters) and a decision concerning their status and date of commencement of Israeli residency will be given by way of a tax ruling. Requests for receiving beneficiary individual status in this track may be submitted in the first stage anonymously. In addition, a specialized form has been established that is suitable for the green track, in which the applicant is required to specify the date on which he became a resident of Israel (if he has already arrived in Israel), declare his compliance with the conditions prescribed in the track, which indicate the absence of affinities for Israel in the 10 years preceding the year of his arrival in Israel or the date of submission of the application (if he has not yet arrived in Israel), as relevant (“the determinant period”), and attach relevant supporting documents.

The conditions that are required for the green track include: absence of a significant stay during the determinant period (up to 90 days per year) of an individual and his/her spouse (the Tax Authority advocates the principle of non-severability of the family cell); in the effective period national insurance fees were not paid, no allowances have been received from the National Insurance Institute and there was no eligibility to receive financed medical care at healthcare organizations or hospitals. There is another alternative to the condition of absence of stay, by which for two non-continuous years out of the determinant period, a stay of up to 183 days in Israel (on the condition that it is not the last year in the determinant period) and a stay of up to 60 days (instead of 90 days in the first option) in each of the remaining years in the determinant period are permitted.

As demonstrated, the strict requirements of the green track deny “entry” to individuals who have a very low affinity for Israel too, such as an individual who has maintained his rights at the National Insurance Institute, even if he did not have a permanent home in Israel and did not stay for even a single day in Israel throughout the determinant period. However, it is not the end of the road for these individuals, who may apply for the individual track.

Tax ruling concerning the issue of fiscal residency certificate for the purposes of the treaty

Spouses who are residents of a treaty country have applied to the Tax Authority in view of their intent to transfer their vital interests to Israel (for the first time) with a request to have conditions set for them whose fulfillment will allow them to be considered as residents of Israel for the purposes of the treaty with their (previous) country of domicile and receive a residency certificate appropriately. The highlights of the decision are as follows:

Spouses will be considered as residents of Israel for the purposes of the Israeli Income Tax Ordinance from the day on which they transfer their vital interests to Israel, as long as they have resided in Israel for a material period from the day of their arrival. The term “material period” was not specified.

Concerning their status as residents of Israel for treaty purposes, a “qualification period” has been set: only at the end of the third tax year from their day of arrival in Israel will the assessment officer issue for them a residency certificate as Israeli tax residents for the purpose of the treaty, retroactively applying from their day of arrival, as long as all of the following conditions have been fulfilled cumulatively:

• The spouses will have a permanent home in Israel.

• In their year of arrival, the spouses will stay for at least 1/3 of their time in Israel; in the second tax year – more than 133      days and in the third tax year – more than 143 days.

• The spouses will declare that they intend to continue to stay in Israel for a period of not less than 143 days in each of the fourth and fifth tax years.

In addition, it has been determined that in each tax year for which a residency certificate will be issued, the spouses are to stay, in each of the other countries, a number of days that is less than the number of days of their stay in Israel during that year.

It appears that by establishing threshold conditions and a qualification period, the Tax Authority is attempting to prevent situations in which foreign residents will arrive in Israel for a short period in which they are likely to yield high incomes (such as when they are expected to sell companies that they hold), only in order to enjoy an exemption in Israel (as beneficiary individuals) and in their country of origin (as foreign residents) for the same incomes.

It is interesting to discuss the case in which the issue of an Israeli residency certificate is required for a third country, for example for an individual who is a resident of France who has immigrated to Israel and who sells soon after his immigration shares in a Romanian company. That individual may be required to procure an Israeli residency certificate in order for the exemption from capital gains tax in Romania to apply, in accordance with the provisions of the treaty between Israel and Romania. It appears that in such a case, the conditions and restrictions set forth will not apply and the Tax Authority will issue a residency certificate for this purpose.