On 2 July 2025, a Memorandum of Law for Amendment of the Income Tax Ordinance (Residency of an Individual), 5785-2025 was published for public comment (“the Memorandum of Law”). The Memorandum of Law seeks to establish a broad reform with regard to the residency of individuals for Israeli tax purposes, which is one of the core issues underlying the tax regime for an individual in Israel.
The stated purpose of the Memorandum of Law is to increase legal certainty of taxpayers regarding their residency status and reduce the likelihood of aggressive tax planning. The foregoing, by establishing conclusive presumptions, based on the days spent by the individual and his/her spouse in Israel, the fulfilment of which will deem the individual an Israeli resident or a foreign resident, as applicable (in a manner that cannot be refuted). We explain this below.
Pursuant to law, currently the residency status of an individual is determined by a qualitative test – the “Centre of Life” test. Within the context of this test, there is a need to examine individually the entirety of the individual’s ties to Israel (his permanent place of residence, his place of occupation, the centre of his economic interests, etc.), with the aid of quantitative presumptions that can be be given to contradiction, based on the number of days spent by the taxpayer in Israel. The “Centre of Life” test often proves to be complex to implement, and in many cases does not lead to an unequivocal conclusion. It has thus been proposed, as aforesaid, to adopt within the ambit of the Memorandum of Law conclusive quantitative presumptions, based only on the number of days spent by the individual and his/her spouse in Israel, the foregoing aimed at establishing legal certainty and reducing the scope of controversy surrounding this issue.
Below is a description of the conclusive presumptions as detailed in the Memorandum of Law:
An individual will be deemed an Israeli resident in the tax year to the extent that the following two cumulative conditions are met:
An individual will be deemed a foreign resident in the tax year to the extent that the following two cumulative conditions are met:
An individual will be deemed an Israeli resident in the tax year to the extent that the following two cumulative conditions are met:
An individual and his/her spouse will be deemed foreign residents in the tax year to the extent that the following two cumulative conditions are met:
It is important to mention, that where none of the conclusive presumptions are met, as detailed above, the prevailing law shall continue to apply, and in such framework the question of the taxpayer’s residency status will be decided based on the substantive “Centre of Life” test, by taking into account the number of days spent by the individual (albeit without use of the quantitative presumptions that may be given to contradiction that currently apply). Moreover, the Memorandum of Law expressly states that provisions of the double-taxation treaties to which Israel is signatory acquire normative priority over the provisions of the Income Tax Ordinance [New Version], 1961, including the conclusive presumptions as proposed in the Memorandum of Law. Accordingly, where the individual will be perceived as a resident of a reciprocal state pursuant to the provisions of the treaty, he will be deemed a foreign resident for the purpose of the grant of reliefs as specified in the treaty, the foregoing even if the conclusive presumptions are met.
A refreshing innovation included in the Memorandum of Law, is the anchoring of the principle of the split tax year. In terms of the provisions of the Memorandum of Law, during the first tax year in which the individual becomes an Israeli resident, he will be deemed an Israeli resident only for portion of the tax year – commencing from the first day of his arrival in Israel (save for a brief stay in Israel of up two 21 continuous days that will not be taken into account with regard to determination of the date of commencement of the residency). On the other hand, during the last tax year in which the individual ceased to be an Israeli resident, he will be deemed an Israeli resident until the last day of that tax year spent by him in Israel).
In our view, the Memorandum of Law, to the extent it will be approved in its current version, is expected to have dual effect. On the one hand, the outline undoubtedly improves legal certainty and is expected to reduce future friction between taxpayers and the Israel Tax Authority surrounding this issue. It also creates greater commonality with the residency tests that are customary in many countries around the world. On the other hand, the technical test of the days of stay, underlying the conclusive presumptions, does not necessarily reflect real life and could, in certain circumstances (for example, a long stay in Israel due to a medical condition) lead to an unreasonable outcome. In our view, a better balance will need to be struck between the quantitative test as proposed in the Memorandum of Law and the substantive “Centre of Life” test, possibly by means of exceptional mechanisms or through designated committees.
On 4 July 2025, US President, Donald Trump, signed The One Big Beautiful Bill Act (OBBBA) – a comprehensive tax reform, that was recently approved also by the US House of Representatives (“the Reform”). This entails a comprehensive legislative process, which is expected to substantively impact Israeli residents who are also US citizens, as well as Israeli citizens, residents of Israel, who invest in US companies, in a number of aspects:
* Note – the scope of the exemption from estate tax in relation to Israeli residents who are not US citizens is still negligible, thus appropriate tax planning is required in order to avoid the imposition of catastrophic estate tax of 40% of the value of the US assets.
We wish to emphasize, that expansion of the exemption from estate/gift tax, as stated above, considerably broadens the arsenal of tools at our disposal for implementing international tax planning, directed to Israeli residents who hold US citizenship. At the same time, intelligent implementation of the provisions of the Reform may lead to a dramatic reduction in future estate tax liability (that could amount to roughly 40% of the value of the estate assets) and even its total nullification.
Moreover, in our view, the far-reaching tax benefits bestowed on US companies as part of the Reform could negatively impact the high-tech economy in Israel, since they provide enormous incentive for investing in US companies and establishing new start-ups in the US, notwithstanding their incorporation in Israel.
[1] “Three-year periods” – each of the following: (1) the tax year and the two preceding tax years; (2) the tax year, the preceding tax year, and the subsequent tax year; (3) the tax year and the two subsequent tax years.
[2] “Weighted days of stay” in the tax year will be considered as follows – each day in the tax year under review will be deemed a full day, each day in the preceding tax year or in the subsequent tax year will be deemed one-third of a day, and each day in the tax year preceding the previous tax year or in the tax year following the successive tax year will be deemed one-sixth of a day.
