The Jerusalem Post

Who is a resident? The sequel


We recently reported that the Israeli Tax Authority received a dressing down from the District Court in a case about residency for Israeli tax purposes in the Lederman case. So it is only fair we report the ITA has now won a different case on the same issue (who is a resident for Israeli tax purposes?) in the case of Eduard Babakhnov (District Court Civil Appeal 61908-01-19 of April 28, 2021).

Who is considered an Israeli resident? According to Israeli tax law, an individual generally becomes a resident for Israeli tax purposes if their center of living is in Israel, having regard to their overall circumstan­ces – including family, economic and social links. There is a rebuttable presumptio­n of residency if the individual spends at least 183 days in Israel in any tax year (calendar year) or 425 days over three years with at least 30 of those days in the latest year.

The Lederman case

This was a capital-gains tax case that hinged on the residency of the taxpayer. The taxpayer sold shares in an Israeli company and made a capital gain of around NIS 10.5 million. He claimed he was a US resident in 2006 when he purchased the shares. The ITA disagreed because his wife was living in Israel at that time. The court ruled that the ITA failed to take into account the taxpayer’s overall circumstan­ces. In particular, the couple were estranged when he purchased the shares, and that there was a clear “turning point” when he did become an Israeli resident.

This turning point was in 2009, when the US work eased up, the financial crisis affected the taxpayer, a hurricane devastated his home in Texas and he sold it, and he and his wife took a vacation in Berlin and agreed to patch up their marriage. He also started paying Israeli national insurance and joined an Israeli health fund. (Zeev Lederman vs Tel Aviv 5 Assessing Officer, 41182-01-19 of March 24, 2021).

The Babakhnov case

This case concerned a diamond dealer who apparently kept poor books that included many cash transactio­ns. He reportedly wrote off long outstandin­g amounts due from customers and amounts due to suppliers. The ITA sought to tax these write-offs. The taxpayer then claimed to be a resident in Russia at the relevant time, living there around 300 days per year with a girlfriend he later married. The ITA rejected this claim as he was still married to his first wife who lived in Israel with their four children at the time.

In the Babakhnov case, the court accepted the ITA’s contention that the taxpayer was an Israeli resident as his center of living was in Israel. Among the center-of-living factors the court took into account were: no separation agreement with his first wife before their divorce; car in Israel; national insurance payments; receipt of Israeli pension/social security; payments to an Israeli health fund; trips to Israel to be with the family for holidays and festivals; permanent home in Israel where his family lived; no permanent home in Russia as he moved around there every few months; he didn’t ship any possession­s to Russia; he held an Israeli passport only, no passport or residency permit in Russia; no fiscal residency in Russia or anywhere else except Israel; business and employees in Israel; most income from Israeli clients; all income banked in Israel; cash withdrawn from an Israeli bank account to pay a supplier in Russia immediatel­y before flying there; no offices outside Israel; postal address in Israel; member of the Ramat Gan diamond exchange; agreements with Israeli clients prepared by his father in Israel; member of organizati­ons in Israel; and generous donations in Israel.

He even filed Israeli tax returns claiming to be an Israeli resident. The ITA and the court refused to accept this as an error because he only raised a claim to be a foreign resident after the debt writeoffs were assessed to Israeli tax. Plus, his first wife gave testimony that when he was away, it was for work. “I had no one else,” she said.

To sum up

The question of who is a resident is multi-faceted. Don’t expect the ITA to agree with you without a high majority of the factors supporting your claim. Consider taking profession­al advice and analysis in borderline cases, especially if much tax is at stake. In the above cases, it remains to be seen whether any appeals ensue.

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 Horoviz Consulting & Tax Ltd.

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