27.01.2013

An Israeli court ruled that income earned on the El Al plane by the US-resident pilot was taxable here.
A recent Israeli court case has ruled whether work done on an El Al jet counts as work done in Israel (Baehr Raphael vs Holon Assessing Officer, Tel Aviv District Court, Income Tax Appeal 1235/06 and 1077/07, issued September 5, 2012).

The facts of the case
The taxpayer was an Israeli citizen who worked as an El Al pilot, mainly on the Tel Aviv-New York route. In the relevant years, it was accepted that he was a US resident. He was liable to Israeli tax on income derived from work performed from a place in Israel, according to Section 4A(a)(4) of the Israeli Income Tax Ordinance (ITO). The issue in this case was whether time worked on the El Al jet was work done in Israel.

The court’s verdict
The judgment was issued by Judge Magen Altuvia, who is much respected in Israeli tax cases. He reviewed the Israel Tax Authority’s contention that the El Al plane was an Israeli  floating island.

The learned judge first said even if the language of the law is unclear, a tax liability may arise when interpreting the law and analyzing its purpose.

In this case, the territorial tax liability in ITO Section 4A(a)(4)  work performed in Israel  is derived from the doctrine of economic allegiance, which was enunciated in a report of experts to the League of Nations in 1923 (Report on Double Taxation, League of Nations Doc. No. E.F.S. 73.F.19, 40 (April 3, 1923).

This report is considered to be the basis of international taxation principles accepted in most countries in the world and for the allocation of income among them.

The economic-allegiance doctrine says that a country is entitled to tax a taxpayer who derives income thanks to the rights, security and sovereign infrastructure accorded to him. The taxpayer owes a debt of economic allegiance to the country that acts as a secret partner in his business, and therefore he must pay it a share of his income.

The court then referred to Section 2A of the Israeli Area of Jurisdiction and Authority Law, 1949, which states: Every airplane or vessel, wherever it may be, which is registered in Israel, shall be regarded as being part of Israeli territory for the purposes of jurisdiction of the law courts.The court noted that the purpose of this is to protect the public from the law of the jungle. Thus, those sitting on the plane are protected as if they are in Israeli territory.

According to the court, the Knesset intended that the place mentioned in ITO Section 4A(a)(4) means both the physical place and the jurisdictional place.

Therefore, the taxpayer (pilot) was performing his work in Israel, not because of the residency of his employer (El Al) but because of economic allegiance that he owes Israel, which extended its authority over the plane where he worked so that he could earn income.

Therefore, the court ruled that income earned on the El Al plane by the US-resident pilot was taxable in Israel.

Comments on the case
This case was a victory for the Israel Tax Authority. Income derived from work done on an Israel-registered plane was found to be taxable in Israel.

It remains to be seen whether the case will be appealed. In the meantime, plenty of questions come to mind. For example:

Do days spent on an Israeli plane contribute to Israeli fiscal residency?
Also, per diem meal-expense deductions are available to Israeli residents when working abroad. Can time spent on an Israeli plane reduce that per diem entitlement?
And will foreign residents who fly on an Israeli jet to Israel to work become liable to Israeli tax when they board the plane abroad? Or when the plane reaches another country or the open sea?
What about planes chartered temporarily by an Israeli airline?
If the answer to any of the above questions is yes, some individuals may choose to fly on non-Israeli airlines or make sure they land before midnight.

They should of course first check if any resulting extra tax in Israel qualifies for a foreign tax credit in the other country(ies) concerned.

As always, consult experienced tax advisers in each country at an early stage in specific cases.

leon@hcat.co

Leon Harris is a certified public accountant and tax specialist at Harris Consulting & Tax Ltd.