ISRAEL Law and Practice Contributed by: Hagit Bavly and Adi Daniel Zamir, Arnon, Tadmor-Levy
If the seller is a “business entity”, it is liable for remitting VAT, and the purchaser will receive an invoice and can offset the VAT against VAT in other transactions (such as payments made to suppliers). If the seller is an individual who is not a “busi - ness entity”, the purchaser shall pay VAT through a self-billing invoice, which can also be offset. The VAT rate in Israel is 17%, and is expected to rise to 18% in mid-2024. Transactions in Eilat, in the southern part of Israel, are exempt from VAT. 8.2 Mitigation of Tax Liability In the past, purchasers have tried to allocate some of the consideration in real estate trans - actions to assets other than the real property (such as equipment, leasehold rights, etc) in order to reduce their purchase tax obligation. The Supreme Court established various tests for the purposes of determining whether equipment is part of the real estate or not – for example, the effect of its separation from the property. Purchasers sometimes claim that some of the amount paid was in consideration for reputation. For this to carry, they must prove that the reputa - tion is independent from the real property, and Municipal tax is determined by the local author - ity, in a “Municipal Tax Order”, which is updat - ed from time to time, subject to a cap growth stipulated by the government. The amount var - ies between different properties, depending on (among other things) the use category and sub - category (such as office, banking, movie theatre, store, etc). Exemptions from municipal tax on usable (as opposed to not used) property are rare, and must establish its value. 8.3 Municipal Taxes
depend primarily on the user – for example, disabled persons are eligible for discounts on business uses, and senior citizens are eligible for discounts on residential uses. Certain uses that the local authority wishes to encourage in its territory receive reduced municipal tax rates. An example of this is a discount granted to software companies by some local authorities in Israel. 8.4 Income Tax Withholding for Foreign Investors Payments to foreigners are subject to withhold - ing tax – 30% for individuals, and the applicable corporate rate for corporations (23% in 2024). All such payments are subject to any applicable tax treaty with the investor’s country of residence, and depend on the classification of the income. Rent is taxable according to the classification of the proceeds: corporations will pay corporate income, while individuals will pay their income tax bracket (this could reach 47%, plus 3% “additional” tax). Tax on rent is paid by the lessor, or by the tenant through tax withholding, subject to exemptions. Tax breaks exist only for income on residential rent, up to a specific annual amount. The sale of real property is taxable at a rate that ranges from 23% (for companies) or 25% (for individuals) to 47% on the profit (see 2.10 Taxes Applicable to a Transaction ). Taxable profit can be reduced by offsetting expenses against the income – in addition to the cost of purchase, the seller can deduct improvements such as: • renovations; • betterment levy; • real interest on loans taken to finance the original purchase; and
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