By: Eli Doron, Adv; Yaron Tikotzky, Adv, (C.P.A); Dr.Slomo Nass, Adv, (C.P.A)
Many people are unaware of the fact that Israel constitutes a tax shelter, and is even considered most suitable for foreign investments in Israeli real estate.
Every country is interested in attracting investments in any possible channel. The tendency of the Israeli legislator to encourage investments, and especially foreign investment – has borne fruit, and during the last months, there is an upside trend in the numbers of investments and real estate acquisitions by foreign residents, in Israel.
According to the Israeli Law, all the revenues or capital gains realized in Israel (territorial tax basis) are subject to taxation. Additionally, an Israeli resident, regardless of the place the profits were generated, is subject to taxation (personal tax basis). However, the Israeli Legislator provides many exemptions to foreigners who are investing here in general and in real estate in particular. The variety of exemptions provided by the Israeli Legislator is very wide. A company in Israel is considered a “foreign resident” that is entitled to benefits, if an Israeli resident is not holding in excess of 25% of its share capital or is not entitled to more than 25% of the revenues or profits of the company.
Recently the Israeli real estate market is catching an honorable place and the foreign investor can benefit from it. A foreign investor can make prudent use of the many conventions preventing double taxation that Israel has signed, as well as enjoy additional exemptions and / or limitations on the rate of tax regarding certain income he is generating in Israel. For example, the double taxation prevention convention signed between Israel and Swede, Norway and Denmark, which provide exemption on capital gain produced from the sale of shares in real estate syndication in Israel. Another example; a foreign investor in Israel is exempted from payment of betterment tax that occurs on the seller and a purchase tax that occurs on the purchaser of a share in a real estate syndication.
Thru correct planning, a foreign investor can enjoy his investments in Israel without losing a portion for tax payments. The foreign investor can make use of the exemption provided to him by the convention as well as the exemption he has under the internal / Israeli Law and so pocket a clear profit. For example, the definition of “Real Estate” in the Israeli Law does not include the sale of construction percentages, and therefore, the sale of construction percentage by a foreign resident in a “convention state”, who sells construction rights unrelated to the land itself, is entitled to an exemption of betterment tax or capital gain in Israel.
One of the possibilities a foreign investor has is an investment through a Reit fund the purpose of which is the holding and management of yielding real estate. Thru the fund, foreign investors can participate indirectly in yielding projects in Israel. In addition to the advantage of participating in this investment, Reit funds enjoy an amendment in the Income tax Ordinance that enables tax payment only on dividend payments, and not on revenues from rent. This is true as long as the Fund distributes 90% or more of the taxable revenues of the Fund as a dividend to its investors.
A foreign investor electing to invest in Israeli real estate, while obtaining professional advice to utilize the Israeli Legislators tendency to benefit the foreign investors, can through prudent investment increase his investment at low cost.