On 21 October 2014, the Haifa District Court handed down its decision in “Yael Zor v the Tax Assessor Haifa” (12-01-19466) concerning temporary residency abroad.
The case relates to a senior employee of a multinational enterprise the shipping company, Zim, who worked in Hong Kong for a subsidiary of the group from January 2006 to August 2008. The employee lived abroad for a period of less than 3 years and, afterwards, resumed tax residence - together with her family - again in Israel.
When the employee returned to Israel, she filed an application for the refund of the taxes that her employer had continued to withhold on her salary during the period that she had lived in Hong Kong.
The tax authorities denied the tax refund. Instead, they issued an assessment qualifying the taxpayer, during the years 2006 to 2008, as an “employee overseas” according to Section 67 A of the Income Tax Ordinance and its Regulations (“Earner of income derived from work performed outside Israel”) 5743-1987; and therefore they assessed tax on the income earned abroad. The tax authorities’ position has always been that the tax residency may only end when a person is outside of Israel for a period of at least 3 years.
The Court decided in favour of the taxpayer and instructed the tax authorities to refund the tax withheld.
The Court considered that the 2003 reform of the personal income tax made the determination of the residence of a taxpayer crucially important. The determination of tax residency based on the “place of the centre of life” demands a qualitative assessment besides the dry legal presumption of residency based on the number of days that a taxpayer is present in Israel in a given year and previous years. The presumption may be disproved by the taxpayer or by the tax authorities based on factual circumstances, reminded the Court.
Consequently, the Court determined that even though the requirements for legal presumption of residency were met, the taxpayer successfully proved that she was not a resident of Israel. For this purpose, the Court took into account various factual considerations to determine the place of centre of life, such as:
- that the taxpayer worked in Hong Kong;
- the family had a bank account in Hong Kong;
- the medical insurance covered the family members during their stay abroad and for this purpose it coverage was expressly extended;
- the taxpayer’s children studied in Hong Kong;
- the family lived in a rented apartment in Hong Kong which was entirely at their disposal; and
- the family had sold their cars in Israel before moving abroad. The Court attributed also substantial weight to the subjective intentions of the taxpayer and her family measured by the fact that the husband had resigned from his employment in Israel for the purposes of the family’s relocation and that the couple's house in Israel had been rented out long term.