The Israeli Encouragement of Capital Investments Law (hereinafter- The Law) encourages investment in buildings designated for residential rental in Israel. The Law grants reduced tax rates and accelerated depreciation rates for both individuals and companies.
Conditions of entitlement
The Law grants benefits for the construction, expansion or purchase of a building for residential rent. These benefits apply to both "buildings for rent" and "new buildings for rent" as defined by The Law and laid out below:
"Building" – The definition includes all buildings that were built during the same period and at the same site, except for part of the building (as discussed below).
"Building for rent" - a building in which at least half of its area is designated for residential rental and which was built up to July 31, 1988.
"New building for rent" - a building for rent as defined above, in which one of the following is also applicable:
- It was approved after January 1st, 2009 (refers to the approval as an "approved asset" by the Authority for Investment and Industrial and Economic Development in Israel);
- It was approved before January 1st, 2009 and was rented for the first time after that date;
- The rented area of the building was rented for the first time before January 1st, 2009 for at least 5 years, and after those 5 years, was rented (the whole building or a part thereof) for at least another 5 years.
Notwithstanding the aforesaid, it is possible that part of the building can be approved as a building for rent if all of the following conditions are fulfilled:
- The approved part includes at least 8 apartments or 6 if it is a new building.
- The investor who owns the approved part has no ownership or lease rights (this also applies to the investors relatives) in the other part of the building that has not been approved.
In order to be entitled to the tax benefits as detailed below, in a new building for rent, at least half of the building shall comprise rental apartments for which the average period of rent lasts at least 5 years out of the 7 years following its construction, provided that for this half of the building, no sale was made before the passage of 5 years of rental stream.
Accelerated depreciation rates:
Generally, in Israel residential rented apartments are entitled to a 2% depreciation rate. According to the Law the investor in entitled to 10% or 20% if it is new building.
The law grants reduced tax rates as follows:
Companies- 11%, Companies invested in by non- Israeli investors- 18%
The above tax rate applies to income from the sale of a new building or income from its rental. Note that companies tax rate in Israel is currently 24% in 2017. Individuals are taxed progressively to the highest rate of 47% plus 3% surtax, when the taxable incomes exceed NIS 640,000 per annum.
Dividends distributed from income derived in rent from such building
A company that has received such dividend, and distributes it as a dividend, shall be entitled to deduct the dividend distributed by it from its taxable income.