In several situations, Israel presents a tax shelter, and can even be considered especially suitable, for foreign investments in Israeli real estate.
Every country is interested in attracting investments. The goal of the Israeli legislator to encourage investments, especially foreign investments, can be seen over recent years, when there has been a marked upward trend in the numbers of investments and real estate acquisitions by foreign residents in Israel.
According to Israeli law, all revenue or capital gains generated in Israel are subject to taxation (territorial tax basis). Additionally, an Israeli resident, regardless of the place the profits were generated, is subject to taxation (personal tax basis). Yet at the same time, the Israeli legislator provides many exemptions to foreigners who invest here in general - and in real estate in particular.
The variety of exemptions provided by the Israeli legislator to foreign investors is very wide. A company in Israel is considered a “foreign resident” that is entitled to benefits provided an Israeli resident does not hold in excess of 25% of its share capital, nor is entitled to more than 25% of the revenues or profits of the company.
A foreign investor can make prudent use of the many conventions preventing double taxation that Israel has signed, and can enjoy additional exemptions or limitations on the tax rate regarding certain income generated in Israel. For example, the convention to prevent double taxation signed between Israel and Sweden, Norway, and Denmark, provides a tax exemption on capital gains produced from the sale of shares in real estate corporations in Israel. As another example, a foreign investor in Israel is exempted from payment of betterment tax that is charged to the seller, and from a purchase tax that is charged to the purchaser of a share in a real estate corporation.
Through correct planning, a foreign investor can profit from his investments in Israel while cutting the portion he pays in taxes. The foreign investor can make use of the exemption provided to him by the convention as well as the exemption he has under the local (Israeli) law and so pocket a clear profit. For example, the definition of “real estate” in 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, the purpose of which is the holding and management of income-yielding real estate. Through a REIT, foreign investors can participate indirectly in income-yielding projects in Israel. In addition to the advantage of participating in this investment, REITs 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 it distributes 90% or more of its taxable revenues as a dividend to its investors.
Eli Doron is a partner at Doron, Tikotski, Amir, and Mizrachi, a law firm engaged in commercial international taxation law.
Published by Globes [online], Israel business news - www.globes-online.com - on June 10, 2008
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