The Israeli Parliament (the Knesset) confirmed an important amendment to the Israeli tax code which significantly expands the reporting obligations of Israeli individuals who are beneficiaries of a trust, individuals who are presumed to be Israeli residents but argue that they are not Israeli residents and individuals who transfer money abroad.
In Israel, most individuals are not required to file annual tax returns. The reason for this is that the Israeli tax system is based on a strong withholding system. As a general rule, only self-employed individuals and employees with high salaries are required to file tax returns. The new amendment, the purpose of which is to widen the net of individuals required to file annual tax returns and report their income, provides that the following individuals will also be required to submit annual tax returns –
- Beneficiaries of a Trust. An Israeli resident who is over 25 years old and is a beneficiary of a trust the value of which is higher than NIS 500,000, is required to file an annual tax return. This obligation does not apply if the individual is not aware of the fact that he is a beneficiary of a trust.
Under current legislation, only individuals who actually receive distributions from a trust are required to submit annual tax returns. Accordingly, to some extent, this new amendment discriminates against individuals who are beneficiaries of a trust and who are now required to file annual tax returns only because of this fact. The reporting obligation applies even if the trust is reported to the tax authorities.
- An individual who is presumed to be an Israeli resident. Under Israeli law, an individual is considered as an Israeli resident if the "center of his or her life" is in Israel. In this regard, Israeli law creates a presumption according to which an individual is considered as an Israeli resident if: (i) the individual stays in Israel during the relevant tax year for 183 days or more; or (ii) the individual stays in Israel during the relevant tax year for 30 days or more, and he/she has stayed in Israel for 425 days or more during the relevant tax year and the preceding two years (the "Residency Presumption").
The new amendment provides that an individual who is presumed to be an Israeli resident under the Residency Presumption must file an annual tax return, despite the individual arguing that his/her center of his life is outside Israel. The tax return must specify the facts and documents on which his/her argument is based.
The required reporting will not apply to the individual's spouse and children, individuals whom the Ministry of Finance has determined are not Israeli residents, and any foreign employees.
This new amendment is expected to affect many individuals who emigrate from Israel, since most of these individuals meet the Residency Presumption at least in the year of their departure. These individuals will now have to file tax returns to the tax authorities and report the fact that they have left Israel.
- Individuals who transfer money outside Israel. An Israeli resident who has transferred an amount of NIS 500,000 or more from Israel in any period of twelve months.
The amendment will apply from the tax year 2016 onward.