Buying office or commercial premises in Israel.
You are about to buy commercial premises (office, store...).
This commercial investment in Israel is designed to bring you rental income or capital gains on resale!
The most important question you need to answer is this:
Is it better to buy the property through an SCI (société civile immobilière) or in your own name?
In this article, we'll explain the advantages and disadvantages of each tax structure.
The legal structure you choose will enable you to make attractive tax savings!
Commercial goods in Israel are subject to VAT.
ImportantThe basic fact is that commercial premises intended for rental are subject to VAT (Maam). In order to reclaim the VAT paid on the acquisition of the property, you will need to choose between an SCI (société civile immobilière - איגוד מקרקעין) or a Ossek mourche.
If you don't choose one of these 2 structures, you can say goodbye to the VAT paid on the purchase of the property.
Please note: In some cases, the VAT authorities in Israel pose problems for VAT refunds. Please contact us if this has already happened to you, as we may still be able to obtain a refund.
SCI in Israel.
The creation of a real estate company (SCI) - Igoud Mekarkein, can be a good way of facilitating the management of real estate assets in Israel and preparing for their transfer.
Definition, advantages and disadvantages of the SCI, particularly in terms of taxation.
A société civile (non-trading company) can be an excellent asset strategy tool, particularly from a tax point of view. But only if you are fully aware of its constraints.
A איגוד מקרקעין, or société civile immobilière (SCI), is a company in which several people (the associates) decide to pool one or more properties. This is done in order to share the profits or benefit from any savings that may result, while agreeing to contribute to any losses.
It is therefore a legally separate non-trading company with a real estate object.
How it works
The company is managed and represented by a managing director. The latter is designated in the company's bylaws or by a vote of the shareholders. It is up to the bylaws to define the scope and limits of his powers. In particular, the bylaws may stipulate that the prior agreement of the associates is required for the purchase or sale of a property. (Normal majority, absolute majority, quorum, etc.).
Associates are entitled to vote on collective decisions at the Annual General Meeting. Voting conditions and majorities are freely defined in the articles of association.
If the company makes a profit, associates receive a share of the profits in proportion to their interest in the company.
Advantages of SCI
- Several people can join together to invest, fund-raising can therefore be much more extensive.
- This is a limited liability company with all its advantages. Not least in terms of legal liability.
- SCI profits are often less taxed as long as they remain in the company and are not distributed to shareholders. (In the form of dividends).
- Possibility of using yourinvestments from retained earnings of a company you own. This will allow you to invest your profits, deferring taxes into the future.
- Dividends between Israeli companies are not subject to taxation, so your SCI will become your taxpayer. real estate investment vehicle Israel.
Taxation of SCIs in Israel
When investing in land, there are always 2 possibilities:
- Investing with the aim of making a capital gain. Investors in Israel know what we're talking about!
- Benefit from the usufruct of the investment in the form of rental income.
In these 2 options, taxation is (slightly) different.
Capital gains investment in Israel
An SCI that realizes a capital gain will be subject to the Real Estate Capital Gains Tax. This tax is levied at the same rate as corporate tax in Israel (23% in 2020).
Please note: The company is subject to this tax, but for the shareholder to recover the profit to him, he will have to pay tax on the dividend (between 25 and 30%). This is the famous Israeli "double taxation" system. First the company pays the corporate income tax, then the shareholder pays the dividend tax.
These 2 taxes combined make a total of 46.1%(For those who like numbers: 1 - (100*77%*70%)).
There are several deduction solutions to minimize dividend tax. (current account, loan, reinvestment, etc.). In general, the shareholder may pay no tax at all in the first 8 to 10 years, depending on his initial investment.
Corporate income tax in Israel (IS)
If the company rents out a property, its profits are subject to corporate income tax (23% in 2020).
If, as in the previous case, the shareholder wishes to recover this income, he will be taxed on the dividend distribution, up to 25% or 30%.
A few points to take into account.
- SCI can depreciate buildings (but not the land) and deduct acquisition costs. (Registration fees, lawyer's fees, real estate agent's fees, etc.).
- When the property is sold, the capital gain will be subject to corporation tax. Any depreciation required over the years will be deducted from the purchase price. (This automatically increases the amount of taxable capital gain).
- The contribution of a property to an SCI is treated as a sale, and is therefore subject in principle to the following taxes registration fees.
There is, of course, the family-type SCI system, which is taxed on a personal basis. This system has become less attractive since the 2017 tax reforms. Don't hesitate don't hesitate to contact us.
ImportantThe purchase of shares in a non-trading property company (SCI) entails payment of the acquisition tax מס רכישה on the market value of the property in the company's possession.
Care must be taken to ensure that investors wishing to join the SCI project do so at the right time, or risk paying taxes that could have been avoided.
Buying your own property in Israel
When you buy a commercial property in your own name, it belongs to you.
We are therefore directly responsible and have no legal protection.
Buying and reselling a commercial property in your own name is administratively simpler than buying with an SCI. There's no need to set up a separate legal structure.
Advantages of buying property personally in Israel
- As mentioned above, the administrative formalities are less burdensome than for an SCI. That's the main advantage.
- No double taxation when "distributing" income.
- Lower tax brackets in certain cases. (Seniors, subsidized or tax-protected properties). Please consult us.
- This is not a limited liability company. The actions carried out within the framework of this company will therefore commit you personally, with all the disadvantages that this entails.
- Profits from your commercial activity are taxed at the tax rate applicable in your country.income tax (rental income) and Bitouah loumi (social charges - passive income scale ranging from 9.61 to 12%).
- You may only use your investment funds from property you own and not from companies you own.
- Banks will ask you to carry personal surety when applying for loans. When you are a company, banks can use the guarantees provided by the company, if applicable.
Personal taxation of real estate in Israel
Here too, we will distinguish between the 2 investment possibilities:
- Investing for capital gains.
- Invest to benefit from long-term rental income.
In these 2 aspects, taxation is different:
Capital gains on the resale of real estate in Israel
Israel's real estate capital gains tax, מס שבח, is subject to a tax of 25%. (in 2020).
This is the case if the property was purchased after 2011.
If the property was purchased before 2011, it will be subject to a different tax system.
So, unlike an SCI, when you sell you only pay capital gains tax. So there's no double taxation. (see above).
Taxes on rental income from commercial property in Israel
If you rent out real estate as part of your business activity, the profits from the activity are taxable at:
- Income tax (rental income), taxable at up to 50%.
- It's important to note that if rental income is considered passive income, tax will start at 31%. And not at 10%, as is the case for active income. (salaries, business income, pensions, etc.).
- In some cases, the income will be considered passive, but you can still benefit from the lower tax brackets. (10%, 14%, 21%...). This depends on a number of factors and needs to be considered on a case-by-case basis.
- At Bitouah loumi (social charges - passive income scale ranging from 9.61 to 12%).
The total tax burden can therefore be as high as 62% of profit!
Nevertheless, in this system, and unlike an SCI, you have the right to benefit from your credits and tax points נקודות זיכוי.
A few points to bear in mind
- You can depreciate the buildings (but not the land) and deduct acquisition costs (registration fees, etc.).
- When the property is sold, the depreciation applied will be deducted from the purchase price. (This automatically increases the amount of taxable capital gain).
When buying a property, you need to consider how your company will use it.
Please note that capital gains may be taxed up to 67% + VAT.
In some cases, the tax authorities in Israel may consider the income generated by your real estate to be your main activity.
In this case, the capital gain on the resale of goods in your possession will be taxed up to 50% + Bitouah Léoumi + VAT.
That is, of course, if you buy it in your own name and not through an SCI.
As a result, you could end up paying almost 67% on the capital gain realized, instead of the traditional 25%.
This depends on a number of factors (nature of the property, know-how, risks, length of time the property has been held, internal/external financing, etc.), and you need to be extremely careful with this subject. This is the new financial windfall for Israel's tax authorities.
An SCI can never be taxed at more than 23% (IS). There is no Bitouah Léoumi on a company's income.
Who does it concern?
- An owner of several apartments in Israel.
- A real estate agent.
- A contractor.
- Someone with experience of foreign real estate.
- This list is not exhaustive.
Even if this concerns you, there are tax solutions to reduce the tax burden on your capital gains. This requires an in-depth study of each case, but can save you several hundred thousand Shekels on each apartment sale.
Before you buy your property, here are the questions you need to ask yourself to choose the best structure:
- Are you planning to make a short-term capital gain?
- Can the tax authorities consider buying and selling real estate in Israel as a business activity?
- Do you own your investment assets personally or do they belong to a company you own?
- Do you need your investment to support your lifestyle or grow your assets?
- Do you need to create a separate legal entity for certain social or tax reasons?
- Do you need legal protection for your real estate assets?
You understand that investing in Israel requires a certain amount of know-how and can bring you substantial returns.
That's why it's vital to get the right advice to optimize your real estate assets in Israel from a tax point of view.
Our firm specializes in real estate tax planning and optimization in Israel. Please do not hesitate to contact us for an in-depth study.
Your questions, our advice
- Can you transfer your property to an SCI? What are the tax consequences of such an operation?
- Can an SCI also buy residential and office property?
- What happens to the VAT paid at the time of purchase?
- Is the sale of an apartment via an SCI subject to VAT?
- Can we reclaim VAT on work carried out before the property is rented out?
- Can the work be recognized as an annual recurring expense, or must it be amortized over several years?
- What costs can we recognize to optimize the tax position of a commercial leasing company?
- Can a salary be used to reduce the gross taxable profit of a real estate company?
- Can we tax-exempt our real estate investments in Israel?
- How is the capital gain calculated when a property is owned jointly by several people?