Mark Twain famously said, “Truth is stranger than fiction.” Interestingly, this adage has spurred the oft-quoted saying, “History is stranger than fiction.” Thankfully for us, sometimes tax history truly is stranger than fiction. In this short article we will describe how the strange but true history of tax legislation in Israel has left open one of the most interesting and profitable tax loopholes in Israeli real estate.
On November 2nd 1917, Authur James Balfour, the United Kingdom’s foreign secretary, sent a letter to Lord Lionel Walter Rothschild, then a leader of the British Jewish community. The letter contained the famous Balfour Declaration, which stated the support of the British government in establishing a “national home for the Jewish people.” The declaration had many long-lasting consequences and became a core component of the founding document of Mandatory Palestine. Following a war within Mandatory Palestine between the Jewish yishuv and the Palestinian Arab forces, Israel declared independence on May 14, 1948, at the termination of the British Mandate.
The war had become a war between Israel and several surrounding Arab states. It concluded with the 1949 Armistice Agreements that saw Israel in control of most of the former British mandate territory, while the West Bank and Gaza were held by Jordan and Egypt, respectively.
The fledgling state of Israel found itself with the enormous task of setting up a government and legislative system, including a comprehensive taxation system. Interestingly, many of the taxation laws in Israel were based on taxation laws of the Ottoman and British rule that preceded the establishment of the state. For example, Israeli income tax was first imposed during the British Mandate, in 1941, when there were only about one and a half million inhabitants in the country.
Some outstanding historical legislation from the Ottoman and British empires is still recognized by Israeli law today. This is good news for the smart investor because it presents tax-free investment opportunities. Particularly of note are the perks of investing in real estate in the West Bank (Judea and Samaria, over the Green Line).
Although Israel took possession of large areas of the West Bank in 1967 as a result of its victory in the Six Day War, it has not legally annexed these areas. This means that these areas are not governed by Israeli law. Rather, a mixture of Ottoman, British, and even Jordanian laws, supplemented by the legislation of the IDF Military Commander, are applied.
Regarding real estate investment, this means that Israeli real estate law and Israeli taxes do not apply to transactions in the West Bank made by foreigners!
But there is a catch. This loophole does not help Israeli citizens (even non-residents) and Israeli residents (even if they are not citizens). They are subject to Israeli laws even when they cross into the West Bank. In this instance, it pays to be a foreigner!
Who is considered an Israeli citizen / resident under Israeli Real Estate Tax Law (Section 16a)?
1) A resident of Israel (This is determined by a “Life Center Test” which analyses where a person’s life is geographically centered).
2) A resident of the West Bank who is entitled to immigrate to Israel as per the Law of Return (Chok Hashvut).
3) Someone registered on the Israeli Population Registry, or someone required by law to obtain registration.
In conclusion: in most cases, if you are a typical non-Israeli citizen and non-Israeli resident,you are exempt from paying Israeli Purchase Tax and Capital Gains Tax on real estate transactions in the West Bank. Furthermore, in most cases, your rental incomes from such properties are also exempted from Income Tax! All because of the strange history of tax legislation in Israel.
So next time you find yourself reading a history book, take careful note since it can possibly save you large sums of money when filing taxes.----------------------------------------
Please note: The above discussion relates to Israeli taxes. You may need to pay taxes to your country of citizenship or tax residency. Please consult with your local tax attorney or accountant to clarify your local tax liabilities.
Always Consult With an Attorney
Due to intricacies and continual revisions to tax legislation, you are advised to consult with a competent real-estate attorney before agreeing to buy or sell a property. He/she will inform you of any changes in real time and determine if you must pay taxes,and how much they will be. For several years, we have successfully provided this informational service to our clients and have often spared them from unwelcome surprises.
Yaakov Epstein Esq., is an experienced Israeli real estate attorney specializing in serving the Anglo community. He will be participating in the Israel real estate expo taking place at the Keter Torah Congregation, 600 Roemer Ave, Teaneck, this Tuesday, November 15. In order to join an informative complimentary talk by Yaacov see page ***. To schedule a personal meeting, please email [email protected]