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/ Noa Lev Goldstein and Adam Kadesh/
Last month’s Israeli Supreme Court’s ruling in Michael Sapir’s case sets a significant precedent on the Israeli international taxation regime in general, and on Israeli residents who relocate abroad in particular.
The ruling deals with a taxpayer who moved to Singapore in 2001. The taxpayer’s immediate family, i.e, wife and adult daughters, remained living in Israel. The taxpayer rented an apartment in Singapore, and was hired there by different companies, and afterwards provided consulting services through a Singapore based company, owned by him. During the entire period, his income was generated solely in Singapore.
In the tax assessments issued to the taxpayer, the Israel Tax Authority claimed that since he made relatively frequent visits to Israel, and because his family remained living in Israel, he should be considered to be an Israeli resident for tax purposes. Accordingly, the Tax Authority decided that the taxpayer’s income, generated in Singapore, is subject to tax in Israel.
The Tax Authority’s position was rejected by the Tel Aviv District Court (Income Tax Appeal 1072/07 Michael Sapir v. Kfar Saba’s Tax Officer), a year ago. The court ruled that the evidence presented by the taxpayer proved that his “center of life” is not in Israel, and therefore he should not be considered to be an Israeli resident for tax purposes.
The District Court Judge Magen Altuvia ruled that while a taxpayer’s family’s place of residence may be used as an indicator of the taxpayer’s place of residence, it cannot be the decisive and/or the solely test; whereas, the taxpayer managed to prove that most of his life’s significant connections are to Singapore, he should be recognized as a foreign resident for tax purposes, and therefore income generated by him in Singapore is not subject to tax in Israel.
The Tax Authority appealed to the Supreme Court and petitioned to overturn the District Court’s ruling, acknowledging the taxpayer as a foreign resident. The Supreme Court’s ruling, issued May 21st, rejected the Tax Authority’s arguments, and determined that the resolution held by the District Court shall be left intact.
The Supreme Court ruled that the taxpayer exhibited enough evidence to the District Court in order to proof his distinct connections to Singapore, in both objective and subjective aspects. The Supreme Court determined that although the taxpayer maintained relatively frequent visits to Israel, and although his has some connections to Israel, it is not enough in order to classify him as an Israeli resident for tax purposes.
Some of these connections to Israel (such as pension benefits, or social security payments) are derived from the fact that the taxpayer lived in Israel for many years, and some of his connections to Israel are derived from his wife and adult daughters’ decision to maintain their life in Israel, and not relocate to Singapore.
The Supreme Court had emphasized in his ruling that the family’s place of resident influences the decision whether the taxpayer is an Israeli resident for tax purposes, but this factor alone cannot turn the scale, while most of the other aspects lead to significant connection to the foreign country.
This ruling has significant implications for Israeli residents relocating to foreign countries. The Supreme Court rejected the Tax Authority’s position that if the taxpayer’s immediate family members remain living in Israel, taxpayers themselves should be automatically classified as an Israeli resident for tax purposes. It was also determined that a taxpayer should not be forced to waive rights accumulated while living in Israel, in order to relocate his center of life abroad, and cut himself off from his Israeli residence.
According to the ruling, in every case a person’s significant connections must be examined in a thorough and profound way. In the case where most of a taxpayer’s connections are to a foreign country – he should be considered as a foreign resident, and income generated by him in the foreign country should not be subject to tax in Israel.
The authors are attorneys at Eitan, Mehulal & Sadot – Advocates and Patent Attorneys, which represented Michael Sapir.
Published by Globes [online], Israel business news – www.globes-online.com