Israeli Resident for Tax Purposes: The AK case

Center of life|Court|Taxpayer| Income Tax Ordinance

Dr. Avi Nov, Adv.

May, 2013

An Israeli district court has interpreted recently the definition of the term Israeli resident under the Income Tax Ordinance. The court ruling was published on a no-name basis but is called the AKdecision. In this case, the Israeli court ruled that the taxpayer remained an Israeli resident in 2005 and 2006, regardless of the taxpayer argument that he relocated to Romania.

The "center of life" test

The Israeli Income Tax Ordinance basically defines an Israeli resident as an individual whose "center of life" is located in Israel. The "center of life" test is decided on relevant facts and circumstances.

The Israeli Income Tax Ordinance provides two presumptions that an individual is an Israeli resident if, in a specific year, he: (1) stays in Israel for 183 days or more; or (2) stays in Israel for 30 days or more in that specific year and for a total of 425 days in that specific year and the two preceding years. These tests are can be rebutted by the taxpayer may prove that his center of life was outside Israel.

The AK case law

In the AK case, the taxpayer argued that he moved to Romania and was not an Israeli resident in the tax years 2005 and 2006. The presence test (described above) was applied by the Israel Tax Authority, and the taxpayer tried to rebut it by proving that his center of life was outside Israel.

The taxpayer’s situation was as follows:

The taxpayer’s wife and children lived in Israel, and he argued that he was separated from his wife and had another spouse in Romania.
The taxpayer owns an active company in Israel but his main business was in Romania.
The taxpayer was not a Romanian resident under Romanian law.

The Court’s ruling

The court accepted, in principle that the economic parameters of the center of life test may lead to the conclusion that the taxpayer's center of life is outside of Israel. However, the court ruled that the taxpayer’s personal and family parameters more robustly supported the Israeli Tax Authority’s contention that he is an Israeli resident.

It appears from this case that he taxpayer failed to present important witnesses, such as his spouse in Romania, who could support his argument. Also, the taxpayer failed to support his subjective intention of being a Romanian resident.

The court, therefore, concluded that the taxpayer’s center of life was in Israel and that he was an Israeli resident in 2005 and 2006.

One of the interesting parts of this decision is that the court did not accept the Israeli Tax Authority’s contention that the fact that the taxpayer's wife and children lived in Israel automatically made the taxpayer an Israeli resident. The court explained that the place where the taxpayer's wife and children live is only one factor for determining the center of life.