International taxation - Recent Israeli Telrom Judicial Decision – possible implications
Recently (November 27, 2008), the Tel Aviv District Court issued its decision in the Telrom case (Income Tax Appeal 1061/2007, Telrom Human Resources Ltd. v. Tel Aviv Tax Assessing Officer).
In its Telrom decision (the “Decision“) the court refers to the interpretation of the term “resident” for the purpose of determining the status of a “foreign worker” in the Israeli “Charge Law” (a law that imposes a certain charge (levy) on Israeli employers of “foreign workers”.
The “Charge Law” imposes the said levy only in case the foreign employee is neither an Israeli citizen nor an Israeli resident.
The appellant argues that in case a foreign worker is an Israeli resident for tax purposes (under the ITO), the said levy should not be imposed.
The court rejected this argument while examining the term “resident” and interpreting this term in the context of the legal area it intends to serv. In other words, the term “resident” for the purposes of the “Charge Law” does not necessarily bear similar meaning as it may have under the income tax code.
While referring to methods of interpretation of legal terms, the court distinguishes between a referral to another legal source and absorption of a term from other legal sources. According to the court, a referral to another law should include a referral to another law as a whole and in its entirety. This is necessary in order to correctly implement the most suitable interpretation of the relevant term as it is meant by the legislator of the “other” law.
The court precisely states that while defining a term through the referral method of interpretation: “the referral would be performed only following an analysis of the components of the definition in the other legal source as a whole, which is not separable … while examining the mentioned law, (i.e., the term in its context in the other legal source – A&H) the interpretation outcome should finally be taken into the referring law. … the content of the legal term, including its entire developments should be copied into the referring law” … (free translation from Hebrew – A&H).
Accordingly and following this reasoning, it may certainly be argued that in case the ITO refers to a foreign legal source or a foreign tax law provision, such a referral should mean an acceptance of the legal definitions and “results” of a specific tax term, as indicated and interpreted under the foreign law.
For example, the reference under Section 5(5)(c) of the ITO to the tax laws of a treaty country (a country with which Israel has concluded a tax treaty) for the purposes of determining “gains”, “income” and “taxable income” of a Foreign Resident Occupation Company under the ITO must also include the foreign rules, regulations and decisions that apply in the treaty country in order to determine the amount of income, the taxable amount and the amount of tax to be imposed by the relevant foreign tax authority. Consequently, the foreign law should be accepted by the Israeli authorities as it is in the foreign jurisdiction with out any Israeli tax law interpretations or deviations in relation to the classification of income, the determination if there is a taxable income or even if a taxable event has actually occurred. for instance, in certain jurisdictions the domestic law does not classy a merger between companies a as taxable event and ,therefore, in case of treaty country – Israeli CFC rules should not be imposed on “passive income” that may be triggered according to Israel’s tax law only. Any contradicting point of view may jeopardize, according to our understanding, the intention of the Israeli legislation and the legal aim of the Israeli as well as the foreign law in the said scenario.
