Israeli Tax Round-Up Including Real Estate Developments – November/December 2021

Here’s a round-up of recent tax cases and developments in Israel.

The Budget:

The budget package of laws passed the Knesset on November 5, 2021 and the Economic Efficiency Law reflecting this was published on November 15. It includes tax, national insurance and other measures mostly technical in nature. These include concessionary tax rates for “trapped” profits (30% of the company tax rate otherwise applicable but not less than 6%). This relates to certain industrial/hitech profits that used to be exempt if retained within an approved/preferred enterprise up to 2011. This is conditional, inter alia, on re-investing “such an amount” in its industrial enterprise within 5 years. See below regarding real estate tax developments.

National Insurance Form 100:

Starting with the October 2021 salary, every employer in Israel (except home help employers) must start filing online every month Form 100 of the National Insurance Institute. This is in addition to Form 102 reporting salaries paid and withholding of taxes and national insurance from salaries. The need for the form emerged when the National Insurance Institute due found it lacked recent data to make corona layoff payments. The form therefore asks for a range of employment facts for each employee – what they do, when they started, work hours, vacation entitlement and so forth. The payroll software packages in Israel are being adapted to help facilitate reporting on Form 100.

 Maternity pay:

The Israeli Tax Authority issued a letter to employers, taxpayers, representatives and service bureau on November 9. It says that employers must treat payments by the National Insurance Institute upon birth or to protect pregnancy like salary and make the relevant pension and savings (hishtalmut) contributions thereon. This should apparently help protect the employees’ pension rights and related Israeli tax breaks – typically a 35% tax credit within limits for the employee’s contribution and exemption for the Bituach Leumi contribution as notional employer.

Cash payments – New Anti Money Laundering Rules:

On August 1, 2022, the upper limit on cash payments involving a business will decrease from NIS 11,000 to NIS 6,000, and the upper limit on cash payments between private individuals will decrease from NIS 50,000 to NIS 15,000. Otherwise fines of 5%-25% may be imposed. This follows a new Order issued by the Knesset Constitution and Law Committee on October 27, 2021.

Supplementary Corona Grant For Badly Affected Businesses:

The Finance and Economic Ministers approved in principle a supplementary corona fixed cost grant for businesses badly affected by Corona, on November 7. The formula for existing grants does not compensate for all fixed overhead expenses such as rent. So a supplementary grant may soon compensate for rental expenses exceeding 17% of sales revenues in 2020 if they were within 90% of the 2019 figure, the business was eligible for at least 3 corona grants and the sales shortfall was at least 80%. If all conditions are met, the grant may amount to NIS 100 per meter up to NIS 120,000.

Court Slams Israeli Tax Authority:

The Israeli Tax Authority (ITA) came in for heavy criticism from the Israeli District Court in the case of Azrieli Fund (Israel) vs. Tel-Aviv 5 Assessing Officer (Ayin Mem 59050-01-20, Sep 9, 2021).

The Azrieli Foundation carries out various charitable activities and is financed by dividends on a 5.69% shareholding in Azrieli Holdings Inc (AHI) which is involved in the well-known shopping mall chain. Charities in Israel generally do not pay tax unless they control a business. In this case, the 5.69% shareholding carried no voting rights. In this case, some of the officers of the charitable foundation were also officers of AHI.  Therefore, the ITA claimed the charitable foundation was in business and assessed the dividends to 25% tax. The Court upheld the charitable foundation’s tax exemption on the dividends, because the shareholding was so small and came without voting rights, therefore it did not control AHI. The Judge (Y. Saroussi) awarded costs against the ITA because of its behavior: ”the case had dilapidated sills and it would have been better to refrain from pursuing this case”.

Court Testimony By Video Conference:

In the case of case of Yaron Meir vs Eilat Assessing Officer, the District Court ruled that a witness who resides in New Zealand may be cross examined in an Israeli Court by video conference – in this case by Skype not Zoom. The taxpayer claimed he could not travel to Israel due to Corona restrictions, the ITA claimed otherwise but was over-ruled based on Section 72(b) of the Civil Proceedings Regulations (Ayin Mem 21579-01-20, March 23, 2021)

Real estate tax developments:

The Israeli budget package of laws includes a number of tax changes regarding Israeli real estate.

Purchase tax increase:

Until recently, purchase tax applied to purchases of only homes at rates ranging from 0% (up to NIS 1,745,865) to 10% (over NIS 17,825,555) and to people that already own a home at 5% (up to NIS 1,294,770) to 10% (over NIS 17,825,555).

Pursuant to an amendment, commencing November 28, 2021, the purchase tax rates went up for people that already own a home (Real Estate Law (Appreciation and Purchase)(Amendment 98), 2021). The rates for them now range from 8% on the first NIS 5,348,565 and 10% over this level.

The Israeli government hopes this purchase tax rate increase may discourage investment in additional homes and take the heat out of rising property prices. Time will tell.

Tax breaks for institutional rental buildings:

Going in the opposite direction, amendment 75 to the Law for Encouragement of Capital Investments, 1959 offers tax breaks to encourage mass investment in long term rental homes if they qualify as “institutional rental buildings”.

Before the amendment, more limited tax breaks were already available for new “rental buildings” that meet certain conditions. Briefly, at least half the floorspace should be rented out for residential purposes for at least 5 years in the 7 years after the end of construction, and no sale is made of half the floorspace until 5 years’ rental have elapsed  – unless at least 50 homes are sold. Approval of the building is needed from the Investment Authority. If only part of a building is involved, it should have at least six homes.  In qualifying cases, tax rates for income and capital gains from a “rental building” is 11% for a company and 20% for an individual. That is after deducting 10%-20% depreciation per year. Sales may enjoy exemption from VAT. Other rules also apply.

The latest amendment adds “institutional rental buildings” approved up to the end of 2031. Approval must be requested with a copy building permit before the end of construction. There should be at least 10 homes generally, or 6 homes if the building is in a prescribed peripheral area. Size rules aim to prevent artificial splitting of homes. The Investment Center board must be satisfied that the homes are to be rented out on average 15 years out of 18 years after the end of construction. There are also rules facilitating long term rentals of homes for at least 20 years, but capable of termination annually and each 5 years by the tenant apparently.

To obtain tax breaks, the homes must be rented out on average 5 years out of 6 after rental begins.

  • Rental and sales gains of companies in qualifying cases may be initially taxed at 11%, potentially decreasing to 9% after 5 years rental, 7% after 10 years rental, 5% after 15 years rental. Dividends are taxable at 20% subject to any applicable tax treaty.
  • Rental and sales gains of individuals in qualifying cases may be initially taxed at 29%, potentially decreasing to 27.5% after 5 years rental, 25.5% after 10 years rental, 24% after 15 years rental.
  • The 5 year rental periods assume rental in 5 out of each 6 year cycle and no sales before the end of the previous 5 year cycle.
  • To preserve future tax breaks after a sale, it seems at least 50 homes must be sold to a purchaser who undertakes to continue with these conditions and is approved by the Investment Authority. The seller or the purchaser must provide guarantees to the Israeli Tax Authority (ITA) to pay the applicable tax plus interest if the conditions for the tax breaks aren’t met.
  • Sales may enjoy exemption from VAT. Purchasers who continue with these conditions may pay only 0.5% purchase tax on their purchase.
  • Investors with approval for “rental buildings” under the old rules may elect to switch to the new rules for “institutional rental buildings” by the end of 2023.
  • There is another transitional rule enabling the new “institutional rental building tax rates of 11%/29% to anyone who filed a bid in a governmental tender before the amendment was published on November 18, 2021.
  • There are also new rules relating to real estate investment funds, i.e. Israeli REITs.


The new “institutional rental building” incentives aim for long term rental as an alternative to home purchase.

However, the wording of the amendment seems open to alternative interpretations in some places. We await clarification regarding the terms, sales, vacant/unlet periods, REITs and tax guarantees to the ITA.

Next Steps:

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

Please contact us if you would like to discuss anything further.

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© Leon Harris 30.11.21