Rental housing is an essential social and economic goal, and it is for a good reason that the Israeli legislator wishes to encourage this sector.  Chapter 7-1 of The Law of Encouragement of Capital Investment provides for tax benefits to encourage the establishment and operation of buildings comprising of rental apartments (hereinafter: “Rental Apartments Building“). Following is a review of tax benefits available with respect to new rental apartments buildings, e.g. such building approved as of January 1, 2009:

• Reduced income tax rates – 11% for companies, 20% for Individuals. Such rates apply to the actual gain from the sale of apartments (including apartments that were not rented) and to rental income.

• Dividend– 15% tax is chargeable on dividend distributed from the earnings of an approved enterprise of a rental apartments building. This rate may be lower according to a tax treaty.

• Accelerated Depreciation – at the rate of 20% per year.

• VAT- exemption from VAT on the sale of apartments and rental income.

In order to qualify for such benefits, a rental apartments building has to meet certain conditions. Those include a minimal rented area, minimal rental period and compliance with monthly rent income limit.

Recently, the Investment Center Administration has issued an update regarding the conditions that have to be met as follows:

• The tax benefits are restricted to an average monthly rent of 6,200 NIS. (The total rent fees in the building, including rent fees from non-eligible apartments, are divided by the number of apartments in the building).

• In case the average monthly rate exceeds 6,200 NIS (app’ 1,800 US dollars) up to 8,000 NIS (app’ 2,290 US dollars) – the tax benefit shall only be granted with respect to 6,200NIS.

• In case the average monthly rate exceeds 8,000 NIS the benefits are denied.

The new changes provide for tax benefits with respect to buildings and offer the possibility to receive benefits  or rental income with respect to apartments in the center of the country, thus turning this law into an attractive investment option.