Poker champ loses Supreme Court bet

The Israeli Supreme Court has just ruled that an Israeli citizen who spent only 30 days in Israel in a particular tax year may be considered an Israeli resident, and hence, liable to Israeli tax on worldwide earnings. In this case the earnings were winnings from poker, but the case will affect employees, business people and even the retired who relocate abroad for a few years (Rafi Amit vs. Tel-Aviv 4 Assessing Officer, Civil Appeal 476/17 of October 9, 2018).

The law

In brief, an individual is Israeli resident if their center of living is in Israel regarding economic, social and family circumstances. Subject to any tax treaty, an Israeli resident is taxable in Israel on worldwide income and gains unless they are in a 10-year tax holiday for foreign income and gains as new or senior returning residents. There is a rebuttable assumption of residency for anyone present in Israel 183 days in one year or 425 days over three years, including 30 days in the last of those years. This can be vague. This court case is just the latest in a long string of borderline residency cases.

The facts of the case

The individual was an Israeli citizen, born in Israel and a bachelor. In 2002-2009 he traveled abroad a lot, discovered poker and proved to be good at it. He won prizes at poker tournaments amounting to $511,000 in 2005, $180,000 in 2006 and $243,000 in 2007, just for examples. And he transferred $580,000 to a bank account in Israel in 2006 and another $466,000 in 2007. In 2007, the year at stake in this case, he spent only 30 days in Israel and claimed to be a foreign resident or a returning resident or an amateur gambler, just not a professional gambler taxable at rates ranging up to 50%. He even bought a house in Canada.

The judgment

The Supreme Court ruled that even though the individual was in Israel only 30 days in 2007, he was an Israeli resident because his center of living was in Israel. He did not make a clean break with Israel. This was based on various facts including: moving his earnings back to Israel, property in Israel, family in Israel, days in Israel before 2007, and not being a resident for tax purposes in any other country. The court said a person doesn’t have to be resident in another country, but it may support the claim his center of living is not in Israel.

He wasn’t a senior returning resident because he didn’t notch up five years residency abroad (now 10 years are needed).

He was ruled to be a professional gambler, not a lay person, because he demonstrated – over a series of games – skill, understanding and ability more than luck. The fact that poker for money or other gain is illegal in Israel was not relevant. The 35% tax rate for lottery winnings in Section 2A of the Income Tax Ordinance does not apply to other income such as business income. An earlier court case ruled that an architect who won a prize in an architectural competition has to pay full tax on the prize.

Closing remarks

This case is significant because it enabled the Tax Authority to raise the ante and claim 30 days in Israel can result in residency for Israeli tax purposes.

The Supreme Court backed an earlier District Court judgment to the hilt and apparently had little sympathy for a poker player who claimed to be resident nowhere.

There will be a big knock-on effect for many other Israeli citizens, from hi-tech to business people and retirees, who relocate to somewhere abroad and visit Israel on vacation or for the festivals.

Please note that ceasing to be a resident for Israeli tax purposes takes at least four tax years, and if you succeed, you may become liable to an “exit tax”. This is really capital gains tax at rates of up to 25%-33% on the market value of your assets.

Tips

If you are a borderline case, check you are resident somewhere for tax purposes, and check where your center of living really is. Don’t bet on being a tax ghost like this poker player. And consider keeping your foreign earnings outside Israel.

As always, consult experienced tax advisers in each country at an early stage in specific cases.

The writer is a certified public accountant and tax specialist at Harris Consulting & Tax Ltd. leon@hcat.co.