Here is a comprehensive and insightful article analyzing the proposed amendment to Israel's tax residency rules, as detailed in the July 2025 legislative memorandum
Introduction
On July 2, 2025, Israel’s Ministry of Finance published a draft bill proposing significant changes to the definition of tax residency for individuals. While the declared goal is to enhance certainty and reduce disputes with the Tax Authority, the proposed shift marks a conceptual departure from decades of jurisprudence and legislative evolution. This article offers an overview and critique of the proposed reform and explores its practical, legal, and international implications.
From Substance to Formalism: The Core Shift
Since 2003, Israeli tax residency has been based on the "center of life" test – a substantive and holistic analysis that evaluates where an individual's familial, economic, and social ties predominantly reside. This approach aligns with international best practices and allows for nuance, context, and judicial discretion.
The proposed reform pivots away from this substantive model and reintroduces a quantitative approach rooted in fixed-day-count thresholds, termed "irrebuttable presumptions" of residency or non-residency. These rigid tests are reminiscent of outdated doctrines from the 1980s and 1990s, which Israeli courts had previously moved beyond in favor of qualitative assessments.
Key Features of the Proposal
The draft introduces several major changes:
A Sixth Factor in the "Center of Life" Test
A new parameter – the number of days spent in Israel in the current, prior, and subsequent tax years – is to be officially added to the five existing criteria, thereby reinforcing the role of physical presence in residency determination.
Repeal of Rebuttable Presumptions
The current rebuttable presumptions (e.g., 183 days in a tax year or 425 days over three years) will be abolished, stripping individuals of the ability to disprove presumed residency through qualitative evidence.
Introduction of Four Irrebuttable Presumptions
Two absolute tests for Israeli residency and two for foreign residency will be introduced:
Presumptions of Israeli Tax Residency:
- Individual-based: 75+ days in the current year and 183+ weighted days over a “three-year period”.
- Spouse-based: 30+ days in the current year and 140+ weighted days over a three-year period, if the spouse meets the first presumption.
Presumptions of Foreign Tax Residency:
- Individual-based: No more than 74 days in the current year and under 110 weighted days over the three-year period.
- Spouse-based: Couple jointly spends no more than 90 days in Israel during the year, and neither exceeds 125 weighted days over the three-year window.
Weighted Days and the "Onion Method"
Borrowed from the U.S. system, the proposal introduces the concept of weighted presence:
- A day in the current year = 1 full day
- A day in the year before or after = 1/3
- A day two years removed = 1/6
This method creates a five-year "look-back/look-forward" window, creating complexity and potential uncertainty.
Partial-Year Residency Rules
To mitigate anomalies, the proposal allows for partial-year residency treatment in the first and last years of residency, excluding short “visits” of 21 days or fewer from triggering status changes.
Legal and Practical Criticism
Retreat from Substance to Formalism
Critics argue that the shift to irrebuttable presumptions erodes the sophisticated "center of life" test and risks taxing individuals who have no meaningful ties to Israel, such as digital nomads, visiting academics, or persons hospitalized in Israel for extended periods.
Conflict with Tax Treaties
The reform risks direct conflict with Israel’s bilateral tax treaties, most of which prioritize qualitative tie-breaker rules such as permanent home and vital interests. According to Article 196 of Israel’s Income Tax Ordinance, treaties override domestic law – which means the new rules may spark international disputes and administrative confusion.
Inherent Uncertainty Despite the Promise of Clarity
While the reform claims to promote certainty, it paradoxically creates a new kind of ambiguity. Because the weighted presence test includes future years, taxpayers won’t always know their status in real time – a major flaw for those planning immigration, relocation, or temporary stays.
Policy and Strategic Implications
Who Is Most at Risk?
- New immigrants (olim) and returning residents
- Digital nomads or remote workers who visit Israel frequently
- Dual-career couples splitting time across countries
- Families relocating for school-year schedules
These individuals will need to track their presence over multiple years, or risk triggering full Israeli taxation on worldwide income.
Potential Upside: Simplicity in Clear Cases
For individuals with very few ties to Israel or consistent full-time residency, the rules could offer a clear, predictable framework. However, such cases are the minority.
Final Thoughts: A Call for Balance
While the desire to reduce litigation and aggressive tax planning is valid, the current proposal may go too far. The irrebuttable presumptions ignore real-life complexity, fail to accommodate exceptional circumstances, and create tension with global treaty norms.
Legislators should consider a hybrid solution:
- Retain a strengthened "center of life" framework
- Use rebuttable presumptions with robust evidentiary thresholds
- Respect treaty obligations and allow for relief in humanitarian or exceptional situations
Conclusion
The 2025 draft bill represents a bold but controversial shift in Israeli tax residency law. As the public comment period unfolds, it is vital that lawmakers listen to legal professionals, international tax experts, and affected individuals, and strive for a system that balances certainty with fairness.