International taxation - Legislative amendments on the matter of requirement to submit an annual tax return in Israel

On April 7, 2016, an amendment to the Income Tax Ordinance (“ITO”) (hereinafter: “the Amendment“) was published, dealing with expanding the population who has to submit annual tax returns in Israel. The provisions of the Amendment will apply to an annual tax return that must be submitted for the 2016 tax year and onward. Following the Amendment, the list of those required to submit annual tax return has been expanded, as follows:

1. An Israeli resident beneficiary (aged 25 or older) in a trust whose assets are worth not less than NIS 500,000 at the end of the tax year, unless he did not know that he is a beneficiary.

2. An individual to whom the numerical presumption in the definition of an “Israeli resident” in Section 1 of the ITO applies (staying in Israel for 183 days or more, or 425 days or more for a three-year calculation), and who argues that he is not an Israeli resident in the tax year. In the tax return, the individual will state the relevant facts and will attach supporting documentation.

3. An Israeli resident individual who transferred over the period of 12 months NIS 500,000 or more outside of Israel. The duty of an individual to submit an annual tax return as set forth is for the tax year in which the money was transferred and for the following tax year (if a sum has been transferred as set forth within 12 months in two parts, in two consecutive tax years, it would seem that the liability to submit a statement applies to the second and third year). We wish to draw your attention to a number of important points that arise from the said Amendment: firstly, in our opinion, the provisions of the new Amendment do not change the prevailing legal situation, inasmuch as every Israeli resident who is 18 years old or older must submit an annual tax return according to the provisions of the primary legislation of the ITO in any case. The regulations pursuant to the primary legislation that provide an exemption from reporting (“the Exemption Regulations“) are those that actually prescribe the reporting duties in Israel, pursuant to which, for example, employees up to a certain income limit do not have to submit annual tax return in Israel. Thus, as long as the exemption regulations are not modified or adjusted, the new Amendment may not have a valid effectiveness. A number of emphases follow:

   1. An Israeli resident individual (above the age of 18) who has transferred NIS 500 thousand abroad must submit a tax return. In the context of these circumstances, there is an interesting question concerning a person who is a new immigrant or a long-term returning resident (a qualified individual). Because those individuals are exempt from reporting their foreign assets and incomes in Israel, the requirement to submit an annual tax return from them is pointless, as foreign assets and the income thereof will not be reported (as the purpose of the demand for “ordinary” Israeli residents is to tighten the control of their investments abroad and to make sure that they will report their incomes). Moreover, such an amendment will encourage the population of qualified individuals not to import their private capital and money into Israel but to leave it abroad. By the way, for the exact same reason, the ITA itself explained in a professional circular that it published concerning new immigrants that the fact that a qualified individual is a controlling shareholder of a foreign company will not require him to submit an annual tax return despite the qualification prescribed in the Exemption Regulations.

   2. An Israeli resident beneficiary, who knows that he is a beneficiary in the trust, must submit an annual tax return, according to the Amendment. In this context too, an exclusion should be published concerning a qualified individual who is a beneficiary in a trust whose assets are all abroad.

   3. Concerning a person claiming to be a foreign resident and who spends more than 183 days in Israel, we should emphasize that this is also the population of individuals relocating in the second half of the year and claiming that they have severed their residency from the time of their departure abroad.

   In conclusion, the aim of the ITA is to identify individuals who have potential tax liability and the corresponding expansion of the reporting duty is a justified mean. However, the ultimate fulfillment of this goal will be by an amendment and adjustment of the Exemption Regulations (and for the sake of argument, it would be enough to amend those Exemption Regulations only, without any need for primary legislation amendment).