An individual is deemed to be an Israeli Resident if his center of life is in Israel. The "center of life" determination is made using a qualitative, substantive test alonside with two quantitative presumptions
Isreal international tax system
In 2003, within the framework of the reform of Israel's system of international taxation, Israel went over to a system of personal tax. It abandoned the territorial system that had been in force (with specific qualifications) before the reform.
According to this system, and as this is reflected in the Income Tax Ordinance (New Version), 5721-1961 (the "Ordinance"), a person – individual or corporation – who is defined as an "Israeli resident" is liable for tax in Israel. They will be taxed on their income from anywhere in the world – the Worldwide System – and not only on income derived in Israel. On the other hand, a "foreign resident" will be liable for tax solely on income derived within the borders of Israel. His income from foreign sources is not liable for Israeli tax.
The critical question is, therefore, in considering liability for tax in Israel on any particular income, is whether the entity producing the income – individual or corporation – is an "Israel Resident" or a "Foreign Resident".
Individual's Israeli residence
Section 1 of the Israeli Tax Ordinance is the definitions section of the Ordinance. This section defines the term "Israeli Resident" for individuals separately and corporations separately.
Regarding individuals, the section stipulates that (free translation from Hebrew):
"Israeli Resident" or "Resident" –
(a) Regarding an individual – one whose center of life is in Israel; for this purpose the following provisions shall apply:
(1) To define the center of life of an individual, the entirety of his familial, economic and social relations will be taken into account, including, inter alia:
(i) Location of his permanent dwelling;
(ii) Location of his and his family's place of residence;
(iii) The location of his regular or fixed occupation or location of his permanent place of work;
(iv) Location of his active and substantive economic interests;
(v) Location of his activity in various organizations, associations or institutions;
(2) The presumption is that the center of life of an individual in any tax year is in Israel –
(i) If he spent 183 days or more in Israel in the tax year;
(ii) If he spent 30 days or more in Israel in the tax year, and the total of the entire period of stay in Israel in the tax year and the two tax years preceding it is 425 days or more; for this purpose, "day" – including part of a day;
(3) The presumption in paragraph (2) can be contradicted both by the individual and by the Income Tax Assessor;
(4) […]"
Thus, 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, immediately after the definition, the Ordinance set forth quantitative presumptions for examining the center of life of an individual.
The examination of the "entirety of the relations" of an individual is mainly a factual one. This examination aims at analyzing precisely and in-depth his lifestyle, as far as possible.
Of course, this is far from a simple task, in which judgment is a crucial element. The examination is long and complicated and takes into account many factual parameters and ties. It needs to be taken into account that every tie is relevant and needs to be given a due weighting in the examination hierarchy.
Given the inherent complexity of the qualitative examination of the "entirety of the relations" of an individual, the Ordinance specified two quantitative presumptions, which are far more easily examined. These presumptions consider the center of life of the individual according to absolute quantitative criteria – the individual is assumed to be an Israel resident if he has stayed in Israel for more than a defined period.
Both the individual or the tax authorities can contradict the conclusion of the presumption and prove the opposite using the center of life test.
Who is a Foreign Resident?
By way of completing the picture, here is the definition of a "Foreign Resident" status in the Ordinance[1]:
"Foreign Resident" – whoever is not an Israel Resident, and an individual to whom the following applies:
(a) Stayed outside Israel for at least 183 days, in every year, in the tax year and the tax year following it;
(b) His center of life is not in Israel, as defined in subsection (a)(1) of the "Israeli Resident" or "Resident" definition, in the two tax years following the tax years set forth in subparagraph (a)".
Therefore, there are two alternatives for the "Foreign Resident" definition. According to the first one, a foreign resident is anyone who is not an Israeli resident under the "Israeli Resident" definition.
According to the second alternative, a foreign resident relative to a particular tax year will be regarded as anyone who has stayed out of Israel during that tax year and in the tax year following it, for more than 183 days (a technical test); and that in the next two years his center or life was not in Israel (substantive definition). If these conditions apply, an individual will be deemed to have been a foreign resident from the beginning of the first year.
[1]Up until Amendment 168 to the Ordinance, the "Foreign Resident" definition was only a supplementary definition and included only the introduction "Who is not an Israel Resident". Amendment 168 to the Ordinance (which was enacted within the framework of the Law Amending the Income Tax Ordinance (No. 168 and Emergency Provision), 5788 – 2008 and which went into effect in January 2007), added the rest of the definition, which is presented here.