A recent amendment to the Law for the Encouragement of Capital Investments (No. 67) lowers tax rates on certain rental buildings. For companies, the tax rate on rental income and sale gains is reduced from 18 percent to 11%. For individuals, the tax rate is reduced from 25% to 20%.
The building needs to be a "new rental building." This is defined as a rental building finished after July 31, 1988, in which at least half the floor space is rented out for residential purposes and was: (1) approved (by the Investment Center) on or after January 1, 2009; or (2) first rented out on or after that date; or (3) is a rented part of a building and first rented out before that date for at least five years, and after that date and that period, at least half its floor space was rented out for an additional period of at least five years. In addition, at least half the floor space must be rented out for residential purposes in 10 out of 12 years after construction, and not sold.
Also, 10% depreciation may be claimed each year on homes in the building.
The remaining nonresidential part of the floor space may be applied to any use, such as commercial or retail.
These measures may be useful for mixed residential-commercial investments where the residential part is held by Israeli investors for the medium to long term. International investors should check whether any Israeli tax savings are lost due to higher taxes in their home country. A handful of Israeli tax treaties contain "tax sparing" clauses that increase the foreign tax credit allowed in those treaty countries.
The inflationary adjustment tax regime was repealed in Israel at the end of 2007 as inflation had been successfully reined in. The regime also included favorable depreciation rates for businesses. Now those depreciation regulations have been resuscitated for three years until the end of 2010. Consequently, businesses may continue to claim depreciation at the following annual rates:
â€¢ Hotel equipment: 20% on a straight line basis;
â€¢ For equipment used in an industrial enterprise of an industrial company, straight-line depreciation may be claimed as follows: 20% if the equipment is used in one shift per day; 30% if the equipment is used in two shifts per day; 40% if the equipment is used in three shifts per day;
â€¢ For equipment used in an industrial enterprise of an industrial company, "declining balance" depreciation may be claimed as follows: 30% for four years and the balance in the fifth year if the equipment is used in one shift per day; 40% for three years and the balance in the forth year if the equipment is used in two shifts per day; 50% for two years and the balance in the third year if the equipment is used in three shifts per day.
In the past, we have reviewed the Israeli tax breaks for "privileged enterprises" under the Law for The Encouragement of Capital Investments, 1959. Many Israeli companies in industry, hi-tech, life sciences and renewable-energy operations and "tourist lodging installations" with at least 11 rooms may now enjoy company tax rates of 0% to 25% and dividend withholding tax rates of 0% to 15%, resulting in total Israeli taxes on distributed profits of 0% to 36.25%.
To claim these privileged-enterprise tax breaks, an Israeli company must effect a minimum investment within three tax years, which is adjusted for inflation according to the Israeli consumer price index. The Israel Tax Authority has published an operating instructions circular (10/2009 of November 29, 2009) listing the current minimum investment amounts.
The basic minimum amount for a new enterprise was NIS 300,000 in 2005, when the rule was first enacted. That amount grew to NIS 308,982 in 2006, NIS 308,084 in 2007, NIS 316,683 in 2008 and NIS 330,979 in 2009. The circular prescribes that you use the minimum amount applying in the FIRST of the three years, even though you need to make the investment before you can elect privileged-enterprise benefits.
A claim is then attached to the tax return of the year first claimed for a project - no bureaucracy.
In addition, privileged enterprises and approved enterprises must be competitive and not overly dependent on the market of any one country; in practice, this translates into a 25% export requirement in nearly all industries except biotechnology and nanotechnology.
Large investments in privileged enterprises by large groups in certain areas of Israel may qualify for an exemption from company tax for both retained and distributed profits as well as an exemption from dividend withholding tax. For 2005, large investments are those exceeding NIS 600,000 to NIS 900,000. By 2009, this threshold had risen to NIS 661,958,094 to NIS 992,937,126. This only applies to groups with annual revenues exceeding NIS 13 billion to NIS 20b. It seems these thresholds were left untouched.
As always, consult experienced tax advisors in each country at an early stage in specific cases.
Leon Harris is an international tax specialist at Harris Consulting & Tax Ltd., in association with Lion Orlitzky & Co. (Moore Stephens Israel)