Aside from the gossipy character of this tax case, there is a lot to learn regarding the application of the Israeli tax residence rules as implemented by the court. In this article, we shed some light on the analysis the court carried out in this specific case, and extract some insights and takeaways
Recently, Bar Refaeli, the famous Israeli international model, reached an agreement with the Israeli Tax Authorities finalizing her continuous tax dispute. Refaeli will pay millions of Shekels in taxes, a fine, and will do some community services, while her mother will go to jail for 16 months.
Aside from the gossipy character of such information, there is a lot to learn regarding the application of the Israeli tax residence rules as implemented by the court.
In this article, we shed some light on the analysis the court carried out in this specific case, and extract some insights and takeaways.
Israeli residence for tax purposes
An individual is deemed to be an "Israeli Resident" if "his center of life is in Israel". The "center of life" determination of an individual is made using a qualitative, substantive test of the entirety of his familial, economic, and social relations (the Israeli Ordinance gives a non-closed list of parameters for testing).
Likewise, the Israeli Tax Ordinance set forth two quantitative presumptions for examining the center of life of an individual.
For an in-depth description of the Israeli tax residence rules for individuals, please click here.
Bar Refaeli's case – the court judgment
On 12.5.2019, the full judgment was allowed to be published in the matter of Bar Refaeli vs. Kfar Saba Tax Assessor by Hon. Judge Shmuel Bornstein. The decision dealt with the residency of Refaeli for tax purposes in the years 2009 and 2010.
The Tax Assessor claimed that Refaeli was an Israeli resident in the relevant years, and thus liable for tax in Israel of her income in those years (income of approximately eight and a half million shekels in the 2009 tax year, and about eight million shekels in the 2010 tax year).
Refaeli, for her part, argued that she is a foreign resident, and thus her income outside Israel is not liable for Israeli tax. Bar Refaeli had appealed to the Supreme Court, but managed to settle with the Tax Authorities, both regarding criminal aspects and civilian aspects, so no substantial discussion took place in the Supreme Court.
The appeal focused on the years 2009 and 2010, during which Refaeli spent significant periods of time outside Israel, earned her living from modeling abroad, and was in a relationship, she claimed, with the American movie star Leonardo Di Caprio.
Tax residence presumptions
In 2009 Bar Refaeli stayed 185 days in Israel, and thus the first presumption (183 days) does apply. She is presumed in that year as an Israeli resident.
In 2010, Bar Refaeli stayed in Israel only 131 days, and thus the first presumption did not apply. Likewise, she stayed only 424 days cumulatively in the two tax years preceding it (2009 and 2008), one day less than is required for the second presumption to apply.
It was thus ruled (despite it being only one day; since the presumptions are a "mathematical cut-off rule") that in 2010 Bar Refaeli did not fulfill either of the duration of stay presumptions. The court once again stressed that the instruction in the Ordinance specifies that part of a day represents a day for counting days.
Burden of proof
It seems that the last word has yet to be said on the question of the burden of persuasion regarding residency. Still, it appears that court, as noted by Judge Bornstein, seeks to apply the "usual rule" in tax appeals (the burden lies on the assessee's shoulders) also in matters of fiscal residency. This for the following reason: "The rationale behind this rule comes from the clear evidential inferiority of the Tax Assessor […] and insofar as the appeal relates the question of the Assessee's residency when most of the information as to his personal circumstances is held by him, it is clear that this rationale applies even more so"(paragraph 54 of the judgment).
Indeed, in paragraph 74 of the judgment, Judge Bornstein says that"[…] at least from an evidential point of view, the position of an assessee who in his case the presumption is fulfilled, is not the same as the position of an assessee in whose case the presumption is not fulfilled, and this also if a few days are involved exceeding or less than the number of days stated in the definition".
However, apparently, from his point of view, the difference, regarding the burden, between an Assessee for whom the presumption applies and an Assessee for whom the presumption does not apply, is not the reverse of the burden of persuasion, but in the weight of the burden. This is shown, immediately after these remarks, the court continued and ruled: "At the same time, and as stated previously, consideration needs to be given that the evidential burden imposed on the shoulders of the Appellant […] as a whole shows that in both cases, that is whether the residency presumption applies to the assessee according to the duration of stay presumption or not, the burden lies with him to prove that he is not an Israel resident. At the same time, in a case where the statutory presumption is fulfilled, the burden is increased, and where the presumption is not fulfilled, the burden is 'regular'" (Paragraph 75 of the judgment).
In our opinion, the court's conclusion in the Bar Refaeli case is far from clear of doubts. It appears to contradict the position of the Supreme Court on the subject, as expressed in TA 3328/15 vs. Ashkelon Tax Assessor (published in 22/2/2017; the "Anon Case").
It is possible, in our opinion, that the court's conclusion on the question of burden of persuasion was contributed – and possibly was determined – by the fact that Bar Refaeli did not claim that she had become a resident of any other country. Thus, an even greater burden than usual is imposed on her: "When considering an Assessee who was an Israeli resident and claims that he has ceased being an Israeli resident, but does not show any other country as his new country of residence, and where his real ties still exist (and not just "negligible points of tie") in Israel, the required strength of significant ties in another country is far higher, to move the center of gravity of "his center of life" to that other country".
The court continued and ruled that the examination of the duration of stay presumptions entails a simple count of days and part of days. But beyond that, in examining the center of life, the following needs to be taken into account:
The number of days of stay in Israel and the number of days of stay in other countries; Bar Refaeli stayed in Israel in 2009 longer than in any other country (although she did not remain in Israel more than half a year), and in 2010 her days of stay in Israel was not significantly less than her days of stay in the USA. This is an obstacle for her.
The number of times the assessee came to Israel and the number of days each time ("An assessee coming to Israel frequently and also staying for significant periods of time, the tendency will be to regard him as an "Israel resident" even if the cumulative number of days of stay in the tax year does not meet the center of days test"): Bar Refaeli came to Israel in the relevant years between 14 and 15 times each year for periods of 10-12 days on average each time. And this is an obstacle for her.
The periods of the year in which she stayed in Israel need to be taken into account "at least to a certain extent", such as the period of the festivals, family events, vacations, and so on. Bar Refaeli comes to Israel for the Tishrei festivals and for Pesach (or at around those times) and family events and festivities. And this is an obstacle for her.
It is possible that for Bar Refaeli, on the backdrop of the entire factual infrastructure specific to her, shows her to have been an Israeli resident in the relevant years. But in our opinion, it cannot be read from the judgment that every case of implementation of these parameters will produce an identical result. A visit to Israel during the festivals, or on a summer vacation, or for a family occasion, for example, does not necessarily, point to a more significant tie than a visit on "ordinary" days. Possibly the opposite is true, a visit during festivals and family affairs shows a connection with family members in Israel, and not a relationship with Israel as a country.
The "center of life" test
It was ruled that Bar Refaeli has a permanent home in Israel – Bar Refaeli's parents' house in Hod Hasharon, is for her a permanent home in Israel. While, as determined in the Amit case, "Life experience shows that an adult person leaves his parents' home and moves his place of residence to another town or another country, he could return and stay at the family home during family visits without the family house remaining his 'permanent home'." But it appears that the home of Refaeli's parents was used for her routine life, she hosted her friends there, she has a wing of the house which has everything she needs, and she always comes there from the Ben Gurion Airport.
It was also ruled that the apartment in YOO Towers, while rented in the name of Bar Refaeli's brother, Dor Refaeli; and the condo in the W Tower was rented in the name of her mother, Tzippi, but the evidence shows that the YOO Towers apartment was at Bar Refaeli's disposal whenever she liked, according to her convenience and her needs. She customarily used it in practice, not as a guest but as a genuine The exact extent of the use is not addressed and likewise the question of whether Bar Refaeli's brothers made use of the apartment. The YOO Towers apartment is also regarded as a permanent home for Bar Refaeli. On the other hand, regarding the W Tower apartment, given the state of the residence and the minimal use made of it by Bar Refaeli, it is doubtful whether this was a "permanent home" for her.
It was ruled that Leonardo Di Caprio's house does not represent a permanent home for Bar Refaeli – Bar Refaeli did not succeed in persuading that Leonardo Di Caprio's home in Los Angeles served a permanent home for her in the USA. In the first place, a not insignificant "evidentiary hole" exists regarding him. Di Caprio did not come to give evidence or anyone on his behalf, and this fact went against Bar Refaeli. She also stayed in his apartment in New York, and there also hosted friends. She also even had another apartment belonging to a relative at her disposal. The address of Leonardo's home was not given to any official party and did not appear in any document relating to Bar Refaeli. No evidence was produced as to the frequency of the stay in Leonardo's house and the extent of her personal belongings there (compared with the parallel extent is her apartments in Israel). Bar Refaeli's status in the house was not established, as opposed to that of the rest of the friends that Leonardo customarily hosted there. According to the testimony of Refaeli's mother, "She has nothing to do alone in his house in Los Angeles when he is not there". The full possessional separation between Bar Refaeli and Leonardo (which was witnessed to by Bar Refaeli) raises a doubt as to the actual partnership between them, amongst other things, in connection with the house in Los Angeles.
The court was prepared to assume that there was a close relationship between Bar Refaeli and Leonardo during most of the relevant tax years, but this is not a "family unit", they were never married, and they do not have any children. Her parents are in Israel; her three brothers (Neil, Dor, and Onn) are in Israel; the relations with the family are very close. Her parents were very involved in her businesses. Refaeli also maintained her relationships with her friends in Israel, and her social relations were not cut off from Israel.
The social relations of a person are not a parameter that is stated explicitly in the Income Tax Ordinance amongst the list of parameters for examining the entirety of a person's familial, social, and business relations. On the other hand, the list is not a closed one. It would appear that Judge Bornstein regards the social relations as a relevant parameter, and ruled that they are mainly in Israel and not in the USA.
It was also ruled that the Appellants' economic ties are connected with Israel. Bar Refaeli's foreign corporations (to which flowed her income from overseas) were controlled and managed by the Israeli Live On company or by Bar Refaeli's mother from Israel. Thus the "foreign" corporations are to be treated as Israeli residents for tax purposes (despite their revenues deriving from modeling work outside Israel). This being the case, they represent an "Israeli" economic interest of the Appellant. Bar Refaeli's mother, her father, and even her advisors operated from Israel. No professional in the area of management or accounting was presented who acted for her in other countries.
We believe that a person's earning capability can undoubtedly be exploited outside Israel – in the area of fashion modeling. For example, it can be assumed that Bar Refaeli could receive far more substantial and more significant contracts for advancing her reputation, the economic value of which far exceeds the value of contracts in Israel. It could be the case that earning power, itself (and not connected to the fact that the revenues are directed to companies that are defined technically as Israeli residents), represent a significant "asset" – if not the most important one for Bar Refaeli and those like her – and relates more to overseas than to Israel, amongst other things since its optimal exploitation depends on activity outside Israel.
Bar Refaeli did not argue and thus did not prove that she has assets overseas apart from a bank account, securities, a work disability policy, and her shares in foreign corporations (which it was determined are Israeli residents, as mentioned previously). On the other hand, she has three assets in Israel: shares in foreign corporations that are classified as Israeli residents, vehicles, rights in the "Blue" project in Tel Aviv (Bar Refaeli did not manage to persuade that she is not the one standing behind the purchase of the apartment, and she is the actual purchaser; the court preferred the evidence of disinterested parties over that of Bar Refaeli's mother).
Bar Refaeli did not prove that she paid Social Security or health tax (apart from work disability insurance) outside Israel.
Judge Bornstein found that Bar Refaeli's testimony regarding the use of an Israeli credit card (she claimed that she did not possess such a card) as opposed to the fact that she actually did also use an Israeli card, demonstrates a "difficulty existing in relying on the Appellant's versions".
Bar Refaeli used Sick Fund services in Israel, although to only a small extent, and on this likewise gave false testimony.
Bar Refaeli acted to promote social causes in the relevant tax years, both in Israel and outside the country.
One of the determining points in the judgment is that Bar Refaeli did not indicate another country in which she was a resident for tax purposes in the relevant tax years. On a particular American form, she even indicated that she was an Israeli resident for tax purposes. In connection with this, the Judge commented: "It is clear that on this point the Appellant's testimony is evasive, and I am unable to accept her tricks of memory whenever it is inconvenient to discuss it and does not match the version of this appeal".
It is of interest to note in this connection that Judge Bornstein regards residency in another country for tax purposes as a very significant indication that can act for the benefit of an assessee seeking to cut off from Israel (Paragraph 116 of the judgment). But it appears that he went one step ahead compared with what was ruled in the Anon
This being so, the question also arose in this judgment (which already appeared in past decisions) whether, theoretically, a person can be entirely "lacking in residency"; and if the answer to this is positive – whether Refaeli lacked in residency in the relevant years.
Judge Bornstein did not rule on the theoretical question but ruled that the case of Bar Refaeli is far from being one of the rare instances in which a person can be deemed to be lacking in residency (for example, someone who lives on a yacht). The facts show, Bornstein ruled, that the home port of Refaeli's yacht is on the shores of Israel.
Referring to the Amit case (CA 476/17 Amit Amshikashvily Rafi vs. Tel Aviv 4 Tax Assessor (October 2018); a case of a gambler who claimed that he is not a resident of any country), the court in the present case said: "However, it appears to me that the matter discussed in the Amit case can mainly show that young people of the Appellant's age who have yet to set up a family, who were born and lived in Israel, who traveled abroad very frequently for purposes of work or personal purposes, and were even there for a significant period, but during that period repeatedly visited Israel for not insignificant periods, and in the end returned to Israel – will be regarded as Israeli residents".
In our humble opinion, this needs to be qualified, and each case examined on its own merits. It is certainly possible that a young, single person, will cease his residency in Israel while maintaining some ties with Israel (perhaps not of the intensity of maintenance in the Bar Refaeli case) even if he decides after some time to return to Israel. The fact that the young person does not have a nuclear family should not, in our opinion, be used against him in this case. Again, it all depends on the overall picture obtained from all of the relevant parameters.
Bar Refaeli also claimed that it could be implied from the assessment agreement for the years 2005-2007 that the tax authorities accepted the position that she is a foreign resident from the year 2007 on. She even called the agreement a "cessation of residency" agreement.
Judge Bornstein said in his opening remarks: "I want first to say that I am very disturbed by the assessment agreement, by the manner in which it was drawn up and conducted. The impression created from the testimonies is that there was between the parties a kind of "silent assent" by which each party can interpret the agreement in the manner that suited it, but without there being a real and genuine agreement to its complete significance, and principally its relevancies, insofar as there were such, go beyond the tax year to which it explicitly refers".
At the same time, the Hon. Judge ruled that this is not such as to silence the Tax Assessor from arguing that Bar Refaeli is an Israeli resident in the years 2009 and 2010. There is some weight to the fact that the Tax Assessor did not have the entire picture about Bar Refaeli and that it was not able to rely on the assessment agreement for our purposes. Bar Refaeli was a party to the incomplete picture in that the representations presented by her were not complete or even incorrect. The rule is that each tax year stands on its own and even if Bar Refaeli's arguments had some substance regarding the agreement, the Tax Assessor cannot be bound by his assessments for previous years but needs to determine a correct assessment based on the applicable law.