Israel: Multi-Asset Taxation

Last Updated: 13 April 2017
Article by Tsippy Bengi

On September 15, 2016 the Ministers Comity for legislative amendments approved the bill proposal, according which as of January 2017, a tax will be levied on holders of three or more apartments, at a rate of 1% of the value of the apartment, as from the third apartment, provided however that the tax amount shall not exceed 1,500 NIS per month (18,000 NIS on an annualized basis), and all that subject to additional conditions, which will be determined by regulations. The proposed bill is supposed to be brought for final vote in the Knesset on November this year.

In the explanatory notes to the bill it was asserted that the decision to impose the tax arise from two major considerations: the first, reducing the inequality between populations; and the second, imposing tax will lead to selling apartments (in order to avoid paying the tax) which will increase the supply of apartments and thus reducing the price of apartments.

Background and the purpose of the amendment

On September 15, 2016 the Ministers Comity for legislative amendments approved the bill proposal, according which as of January 2017, a tax will be levied on holders of three or more apartments, at a rate of 1% of the value of the apartment, as from the third apartment, provided however that the tax amount shall not exceed 1,500 NIS per month (18,000 NIS on an annualized basis), and all that subject to additional conditions, which will be determined by regulations. The proposed bill is supposed to be brought for final vote in the Knesset on November this year.

In the explanatory notes1 to the bill it was asserted that the decision to impose tax arise from two major considerations: the first, reducing the inequality between populations; and the second, imposing tax will lead to selling apartments (in order to avoid paying the tax) and increasing the supply of apartments thus reducing the price of apartments.

The sharp rise in prices of apartments as aforementioned increased, according to the explanatory notes, the gaps between the various population strata in Israel. According to data published in the explanatory notes it appears that the rate of household residing in an apartment owned by them among the second decile stands on 54% compared to 80% among the ninth decile. It was further asserted that according to the data taken from the Tax Authority, the average income per household owning three or more apartments amount to 3 times the average income of a household in Israel.

Furthermore, the second consideration behind imposing the tax is that the taxation may lead the house owners to sell the apartments in order to avoid the tax payment and thus increase the supply of apartments, which may lead to reducing the apartment prices.

It was further asserted that the move may lead to an increase of approximately 800 million NIS per year in the State revenue.

The basic principles of the bill

Levying tax on multi-asset holding as follows:

  1. As of 1 January 2017, annual tax will be imposed on apartment proprietors holding three or more apartments, on each of the apartments, starting from the third apartment.
  2. The tax rate, which will be levied on each one of the apartments pursuant to clause 1, will be 1% of the amount that will be determined in a table to be published by December 31, 2016 times the number of square meters as has been set in levying of the municipal tax re each apartment, provided that the said amount shall not exceed 1,500NIS per month.
  3. The amount that will be determined, relating to the tax level that will be imposed under clause 2 will rely on approximate value of residence square meter for each zone. The approximate residence square meter value calculation in each zone will be made according to the country's division into various zones, including by using the statistic zone table of the Central Bureau of Statistics
  4. An apartment owner is entitled to choose which of the apartments in his ownership will be deemed as the third apartment and upwards; if the apartment owner did not select as aforementioned, the tax will be imposed on the cheapest apartments among the apartments he owns, pursuant to the information kept by the Tax Authority.

According to the main principles of the bill and the explanatory notes, it appears that there is no significance how the proprietor has obtained ownership of the three apartments, in other words: the tax will be levied on anyone holding three or more apartments. Thus, there is no distinction between a holder, who inherited the apartment, a holder that does not rent out the apartment or classical real estate investors.

As stated in clauses 2-3 of the basic principles of the bill, the tax rate will be levied based upon the number of meters multiplied by the value per meter. The value per meter will be published on 31.12.2016. That is to say, one day prior to the bill taking effect. Therefore, and since the apartment holders have no way of knowing, at this stage, from which value the tax will be derived, they are unable to assess whether or not they should sell the third apartment they own.

Further re the value, it should be noted that the value per meter will be determined pursuant to the county's division to zones, when the peripheral coefficient and a socio-economic index will be taken into consideration (data published at the CBS), regardless of the size of the apartment or its nature. Thus, for example, the value per meter of a 3-room apartment will be equal to the value per meter of a penthouse apartment in the same area.

Advantages and Disadvantages

As stated above, the move of imposing tax on holders of three or more apartments is supposed to lead to the reduction of the gaps between the population strata and in addition assist in reducing the price of apartment. There is no dispute that both objectives, if attained, are appropriate objectives that are supposed to assist mainly the weak sections of the populations and the middle class in purchasing an apartment.

Alongside the appropriate objective of the bill, the bill, in its present form, raises a number of question whether it may achieve those objectives.

It would be interesting to see how the implementation of the bill affects the rental market in the country (Israel), which has also been enjoying a considerable rise in prices in recent years.

It may be said with rather high probability that not all apartment holders will choose to sell their third or additional apartments in order to avoid paying the tax due to several reasons: one, the tax rate and the ceiling that has been set, 1,500 NIS per month, is not high enough to constitute an incentive for selling an apartment. One should keep in mind that one of the central reasons that there are about 50,000 apartment owners holding three or more apartments arises from a low interest environment, when in addition to the low interest rates on the mortgage, the alternative of other investments that have been common in the past, such as depositing money in the bank, are not attractive.

According to the CBS data and as was specified in the explanatory notes of the bill, most of the people who do not own an apartment belong to the lowest deciles. In other words, the weak sections of the population rent apartments and do not buy apartments. It is very possible that a person holding three or more apartments will choose not to sell the third apartment, the cheap one, but rather raise the rent charged so in fact will roll the tax onto the renters.

Thus, ultimately, the move may actually worsen the situation of the weak sections of the population. Should the apartment holders not choose to sell the apartments for the reasons stated above, or due to other reasons, then the supply of apartments will not increase in the secondary market and this may not lead to the reduction in the housing prices. Beyond that, it is likely that the apartment holder will raise the rent charged in order to role the tax onto the renters.

Summary

There is no doubt that the purposes apparently underlying the bill are appropriate, and if achieved, would be a blessing that may relieve us all. Nevertheless, it is very doubtful whether the implementation of the bill will lead to achieving the objectives and purposes or rather, it may lead to the opposite result, which will worsen the situation of the weak sections of the population and of the middle class, which is crying out for an apartment in the country.

Footnote

1 Multi Asset Taxation regulation 7688-2016, 2 August, 2016

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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