Commencing January 1, the concept of a Real Estate Investment Trust (REIT) will be introduced in Israel with the aim of stimulating the Israeli real estate market. Similar vehicles exist in the US and Canada and are expected soon in the UK. The REITs will in various types of properties, allowing the public to make investments linked to real estate without having to purchase a property directly. Although purchasing shares in a REIT will be similar to buying shares of stock in a company, the Israeli tax effect will be different. Various requirements must be met for the REITS to form including the following: The REIT must be a company incorporated in Israel and its business must be controlled and managed from Israel; its shares must be listed and marketed on the Tel Aviv Stock Exchange within 12 months after incorporation; at least NIS 200 million must be invested in real estate - at least 75% in Israel; at least 90% of income must be distributed by April 30 after year end; and shareholders are taxed on such distributions at source at full rates instead of the REIT company. Various other conditions also apply. What use is a REIT? It will be able to attract investors from the public. Income distributed to shareholders by a qualifying REIT will be taxed as income of the shareholders, not of the REIT and tax will be withheld at source, accordingly. However, short-term capital gains realized within four years will be taxed at ordinary income tax rates and "exceptional income" will be taxed at an astronomic rate of 70%. Exceptional income is income from sale of business inventory and any other income not from real estate, publicly traded securities, state bonds or deposits if it exceeds a minimum threshold of 5% of total income. Note that Israeli provident funds and retirement funds resident in a country that has a tax treaty with Israel will be exempt from Israeli tax. Foreign taxes may be deducted as an expense, but no foreign tax credit will be granted to the company or its shareholders (subject to any tax treaty, apparently). Other income of the company will be subject to tax at regular rates (or 60% for "exceptional income") plus a 25% dividend withholding tax on the income after company tax. To sum up, the Israeli REIT tax regime will be governed by rigid rules and limitations - this is the price of going public on the Tel Aviv Stock Exchange. In the case of a private fund offered to less than 35 investors, a similar but more flexible result may be obtainable via the alternative vehicle of a limited partnership formed under Israeli or foreign law. Leon.firstname.lastname@example.org The writer is an International Tax Partner at Ernst & Young Israel.