Recently the Real Estate Tax Law was amended and major changes were made to real
estate purchasing procedures in Israel.
This followed World Bank
The amendment aims to make it quicker and easier to obtain the
tax approvals needed to transfer title at the land registry (Tabu). In this
article, we will try to make sense of the changes.
It is important to
note the new countdown for reporting Israeli real estate transactions for
Israeli tax purposes.
When does the countdown begin? Generally the
countdown begins on the date any agreement is signed. Even if the agreement is
only effective upon the fulfillment of a number of conditions, case law has
determined that the “sale date” is the date of signing the agreement. The
“agreement” can even be a term sheet (“zichron devarim”) or any other agreement
which the parties may reach, in writing or verbally. Our advice is to consult a
lawyer before you sign any of these – otherwise you may start the tax countdown
After 40 percent is paid comes the withholding tax After the first
40% of the purchase price has been paid to the seller, the buyer must withhold
tax from the next payment due under the agreement and remit it directly to the
Tax Authority as a payment on account of land appreciation tax payable by the
seller. The amount of tax to be withheld depends on the date when the seller
acquired the real estate interest. If the seller’s acquisition date was before
November 7, 2001, the rate of withholding tax is generally 15% of the
consideration fixed in the agreement relating to the current transaction. If the
seller’s acquisition date was after that date, the rate of withholding tax is
7.5% of the consideration of the consideration fixed in the agreement relating
to the current transaction.
How does the buyer know the acquisition date
of the seller? It seems that initially the buyer will need to rely on what the
seller says in his self-assessment for land appreciation tax (capital gains tax
on Israeli real estate) purposes. If the Tax Authority has already issued an
assessment when the withholding tax is due, the buyer can rely on the
acquisition date in that assessment. If it turns out that the seller owes less
than the tax withheld by the buyer, the seller will receive a refund of the
excess tax withheld, plus interest and indexation (inflation
The benefit of withholding tax An advantage of paying the
withholding tax to the Tax Authority is that the buyer can then receive the
approval needed to transfer title without being dependent on any assessment
procedures conducted by the seller.
Withholding tax exceptions The
obligation to withhold tax applies to deals settled with cash consideration
only. There is no obligation to withhold tax in the following cases: combination
(barter) deals; gifts; swaps; a sale of a home if the seller elected a sale
exemption; a purchase of real estate from the State of Israel, the Israel Land
Authority or a local authority; a purchase from a builder who holds a “Form 50”
(i.e. confirmation that it is taxed as a business).
When buying from a
builder, check that the builder has such confirmation from the Tax
Otherwise, you must withhold tax at the rate of 7.5%,
regardless of the seller’s acquisition date, according to a relaxation published
by the Tax Authority.
The new law allows the parties to apply to the Tax
Authority for a reduction or exemption of the withholding tax. Such an
application is filed when reporting the transaction and the Tax Authority has 20
days to reply. The Tax Authority’s reply cannot be appealed.
days, a report is due Both the buyer and the seller must report the transaction
to the Tax Authority within 40 days after the signing the transaction
This report is considered to be a self-assessment declaration.
It must include a detailed calculation of tax due or any exemption claimed in
the case of a home. It must also include details of the property rights sold,
the value and any expenses claimed, accompanied by supporting receipts and other
documentation regarding the expenses.
Within 20 days after filing a self
assessment declaration, the Tax Authority will send the parties a notice
specifying the resulting tax due according to their declarations.
60 days, pay the tax Both the buyer and the seller must pay any tax due within
60 days after signing the transaction agreement. The buyer pays acquisition tax,
the seller pays land appreciation tax.
In the case of the buyer of a
residential property, acquisition tax is due at graduated rates ranging up to 5%
for an only home in Israel or at up to 7% if the buyer owns more than one home
in Israel. For all other types of real estate in Israel, the buyer pays
acquisition tax at a flat rate of 5%.
The seller pays land appreciation
tax. Companies pay land appreciation tax at the regular company tax rate (24% in
If no home-sale exemption applies, individuals pay land
appreciation tax at a rate of 20% if the real estate asset was acquired after
November 7, 2001 and is held as a passive investment.
tax is imposed on individuals at their marginal tax rate (ranging up to 45% in
2011), to the extent that the real estate was acquired before that
If the tax due according to the Tax Authority’s assessment is
higher than the tax on the self assessment declaration, the difference must be
paid within 14 days after issuance of the Tax Authority’s assessment. Interest
and indexation applies from the 60th day after signing the transaction
agreement; fines and enforcement procedures are also
Postponement of tax Payment of tax due may be deferred until
one of the following events: The buyer receives possession of the real estate; •
The seller gives the purchaser or to his order an irrevocable power of attorney;
• For land appreciation tax, until the seller receives 40% of the sale
consideration; • For acquisition tax, until the seller receives 50% of the
• Postponed tax will still accrue interest and indexation
from the original due date.
Within 8 months, assessment by Tax Authority
Within 8 months after the filing of the self-assessment declaration, the Tax
Authority will issue its own assessment. This may constitute acceptance of the
self-assessment declaration or it may be different.
If it is different,
the Tax Authority must first discuss it with the taxpayer. The taxpayer can
object to the Tax Authority’s assessment within 30 days. The Tax Authority then
has another eight months, generally, to respond to the objection, but can take
another four months for “special reasons” approved by the director of the Tax
Authority. If the taxpayer is dissatisfied with the Tax Authority’s response to
the objection, the taxpayer can lodge an appeal to an Appeals Board within 30
As always, consult experienced tax advisers in each country at an
early stage in specific cases.
orit@zivtax .co.il ,
email@example.com Orit Koch is Head of the Real Estate Tax Section at Ziv Sharon
& Co Law Office, formerly Director of Appeals at the Tel Aviv Real Estate
Assessment Office of the Israeli Tax Authority. Leon Harris is a certified
public accountant and tax specialist at Harris Consulting & Tax Ltd.