April 23, 2014
By Adi Ben Yair-Yosef, Esq. - Hacohen Wolf Law Offices
On March 18, 2014, the Tel-Aviv District Court ruled in a case before the Court which could have significant ramifications for foreigners owning real estate in Israel. The ruling dealt with foreign residents, in this case, English citizens, who sued the Israel Tax Authority in Tel Aviv, for disallowing them to pay the 6 million Shekels of capital gain tax they owed for selling their apartment in Israel, through installments.
The claim of the Israel Tax Authority (the "ITA"), was that foreign residents are not entitled to make installments payments as opposed to Israeli residents who are entitled to do so according to Israel local law. The Plaintiffs claimed that one cannot apply local Israeli law selectively to foreign residents and that by making a distinction between Israeli residents and foreign residents is discriminatory, in light of Article 21 of the Treaty between Israel and the United Kingdom to avoid double taxation (the "Treaty") which prohibits discrimination against foreign residents, i.e., in this case citizens of the United Kingdom, when applying Israeli domestic law concerning taxes.
Article 21 of the Treaty states that: "The nationals of one of the Contracting Parties shall not be subjected in the territory of the other Contracting Party to any taxation or any requirement connected therewith which is other or more burdensome than the taxation and connected requirements to which the nationals of the latter Party in the same circumstances are or may be subjected."
The Court dealing with the case ruled that the Treaty prevails over domestic law in Israel and therefore in light of Article 21 of the Treaty, it is prohibited to selectively apply domestic law in Israel on nonresidents and the ITA should allow the plaintiffs' installment payments of the capital gains tax owed for the sale of their home in Israel just like it would allow Israeli residents.
Based upon this ruling and the reasoning behind it, we believe that there could be good news for foreigners owning an apartment in Israel who were negatively affected by the recent changes made to the real estate taxation laws that came in force on January 1, 2014. (hereinafter the" Reform”) You can read about these changes in our updated Quick Guide to Israeli Property Tax on our website. The Reform deals with the changes in taxation regarding real estate transactions and also with differences relating to foreign citizens as opposed to Israeli residents.
For example: when a foreign resident purchases his single home in Israel he will not be entitled to the low tax brackets that apply to Israeli residents who purchase a single home in Israel, but rather to the higher tax brackets that apply to Israeli residents that purchase additional homes. However, if one immigrates to Israel by making Aliyah or become a תושב חוזר ותיק (a returning Israeli citizen who resided outside of Israel for at least 10 years) within two years of the purchase, they will be entitled to a tax refund, and to the reduced tax rate of a single home.
In addition, when a foreign resident sells his apartment in Israel, he receives “selected” treatment by not having an exemption from capital gain tax even if it his only residential apartment in Israel as opposed to Israeli residents who receive the exemption when selling their only home. The exemption will only be granted if the Israel Tax Authority receives a statement from the tax authorities of the country of residency proving that the foreign resident does not own a home in his country of residence.
Conclusions: Under the Reform, foreign residents are taxed differently from Israeli residents when selling or purchasing their only home in Israel and are not entitled to the same exemptions and tax brackets as Israeli residents selling or purchasing their only home. According to the judgment as stated above, one might be able to argue that the Reform should be changed as it is breaching the article in the Treaty stating non discrimination which prohibits foreign residents to be taxed beyond the Israeli local tax requirements and that when foreign resident purchases or sells his only apartment in Israel, he or she should be entitled to the same tax benefits as an Israeli resident.
*The content of this article is intended to provide a general guide to the subject matter and is not a substitute for legal consultation. Specific legal advice should be sought in accordance with the particular circumstances.
Hacohen Wolf is a law firm specializing in Real Estate, Taxation and Commercial Law with offices in Jerusalem, Tel-Aviv, New York, London, Amsterdam and China.