Rental building tax breaks in Israel

Rental building tax breaks in Israel

16.12.2009

A recent amendment lowers tax rates on certain rental buildings (Amendment 67 to the Law for the Encouragement of Capital Investments).

For companies, the tax rate on rental income and sale gains is reduced from 18% to 11%. For individuals, the tax rate is reduced from 25% to 20%.

The building needs to be a ‘‘new rental building‘‘. This is defined as a rental building finished after July 31, 1988 in which at least half the floorspace is rented out for residential purposes and was: (1) approved (by the Investment Center) on or after January 1, 2009, or (2) first rented out on or after that date, or (3) is a rented part of a building and first rented out before that date for at least 5 years, and after that date and that period, at least half its floorspace was rented out for an additional period of at least 5 years. In addition, at least half the floorspace must be rented out for residential purposes in 10 out of 12 years after construction, and not sold.

In addition, 10% depreciation may be claimed each year on homes in the building.
The remaining non-residential part of the floorspace may be applied to any use, such as commercial or retail.

These measures may be useful for mixed residential-commercial investments where the residential part is held by Israeli investors for the medium-long term.

International investors should check whether any Israeli tax savings are lost due to higher taxes in their home country. A handful of Israeli tax treaties contain ‘‘tax sparing‘‘ clauses which increase the foreign tax credit allowed in those treaty countries.

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

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Leon Harris is an international tax specialist at Harris Consulting & Tax Ltd.