Tax Alert No. 41 - 

International taxation  12.4.2022

Draft Amendment – worsening of the status of foreign residents regarding residential apartments - 12.4.2022

There is a proposal, in a draft law that was published on January 13, 2022, for the changing of legislation on a number of issues. We will focus on the denial of significant exemptions for foreign residents regarding residential apartments: tax exemption on rental income, exemption from betterment tax on the sale of a sole apartment, and linear exemption for the betterment of an apartment that is not a sole apartment.

It is stated in the explanatory words to the draft that foreign residents (not including Israelis having an Israeli I.D. card who are no longer residents of Israel), own 83 thousand residential apartments, approximately half of which are located in Tel-Aviv and Jerusalem. In light of the shortage of apartments on the supply side and the high prices, it is being proposed that the tax reliefs that exist for residents of Israel in identical cases be denied to foreign residents, as follows:

Cancellation of an exemption on rental income from residential property for foreign residents

Rental income from residential property in Israel is exempt from tax up to a ceiling of approximately NIS 5,000 (approximately $1,500) a month.

It is proposed that the exemption shall no longer apply for a foreign resident, and from now on a foreign resident can make an election between reporting and having a tax liability on the regular tax track (at the marginal tax rate on the income less expenses and depreciation) and tax at a rate of 10% on turnover (at this stage it is not proposes to deny a foreign resident the election for a 10% tax track).

The application of the proposed change – as from January 1, 2024 and thereafter.

Comment: If the Taxes Authority really has the abovementioned distribution, with the identification of the apartments that are owned by foreign residents, and if the amendment in this matter is passed as is, it will be interesting to see whether 83,000 people will actually be added to the number of submitters of reports and payers of taxes (less any double counting for foreign residents who own several apartments)!

Cancellation of the exemption for a foreign resident on the sale of a sole apartment

Real (non-inflationary) betterment on the sale of a sole residential apartment up to a sale value of approximately NIS 4.5 million is exempt from betterment tax at present.

A foreign resident must prove (there are ways that make this easier) that it is their sole residential apartment, in other words, he does not have another apartment in his country of residence).

It is proposed that this exemption be cancelled for a foreign resident, and that it will only apply to a resident of Israel.

The application of the proposed change – it is proposed that the new law shall apply to the sale of a residential department that is executed as from January 1, 2024 and thereafter.

Qualification for an exemption: It is proposed that the new law shall apply to a resident of Israel who becomes a foreign resident, if and only if on the day on which the apartment is sold five years have passed since the day on which he ceased to be a resident of Israel.

Cancellation of an exemption for a foreign resident on the sale of an apartment that is not a sole apartment (the linear exemption)

“The linear exemption” – the sale of a residential apartment, which is not a sole apartment, is currently chargeable with taxation in accordance with the “linear exemption”, i.e.: the capital gain is divided into two periods:

  • The component from the day on which the apartment was purchased and until the end of the year 2013 is tax exempt;

  • The component beginning in 2014 and up to the day on which the apartment is sold – chargeable with betterment tax at a rate of 25%;

The application of the proposed change – on the sale of a residential apartment that is executed from January 1, 2024 and thereafter.

It is proposed that this exemption be also denied to foreign residents and that is will only apply to a resident of Israel

Insights regarding a foreign resident

The legislator is seeking to signal a red light warning to foreign residents, that it is worth their while to get rid of the residential apartments that they own, and that they should realize the profits that they have generated from them – and that this is certainly the case if they are sole apartments, and even if they are not such, they still contain a significant linearly exempt component – up to January 1, 2024!!!

We would mention that the transfer of an apartment from a foreign resident to a resident of Israel as a gift without consideration, is an appropriate solution in the relevant circumstances.

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