As of January 1, 2014, a nonresident is not entitled to an exemption from capital gains tax (also known as betterment tax or land appreciation tax) on the sale of a residential property in Israel, as opposed to an Israeli resident (provided that the Israeli resident meets the other conditions of the exemption).
However, this rule has an exception subject to these conditions:
- The foreign resident (and his or her spouse and children under the age of 18) does not own a residential property in his country of residence;
- The foreign resident will submit confirmation from the tax authorities in his country of residence that he does not possess a residential property in his country of residence;
Then he will be able to receive an exemption from capital gains tax in Israel (assuming that he meets the other conditions of the exemption).
After implementing the above instructions for several years, it became clear that the tax authorities in most countries of the world do not provide confirmation to their residents regarding whether or not they own a residential property in that country (to the best of our knowledge only Belgium and Russia provide this approval).
For that reason, the Israeli tax authorities issued an amended implementation instructions in 2017 (Appendix No. 2 to the Real Estate Taxation Directive No. 5/2013) according to which a foreign resident is entitled to prove that he does not own a residential apartment in his country of residence without approval from the tax authorities but by other means:
- The seller (foreign resident) has the burden of convincing the Tax Authorities in Israel that he does not own a residential property in his country of residence by using objective The Tax Authorities in Israel have the discretion to decide whether they are convinced that the seller does not own a residential property in his residential country.
- The seller (foreign resident) must provide proofs (in writing) indicating where he lives and that his apartment does not belong to him. He must furnish a rental agreement or other agreement indicating that he is not the owner of the apartment, in which he lives but a tenant and an approval from the municipal authority that he pays taxes in relation to the apartment as a “holder” of the apartment and not as its owner.
- The seller (foreign resident) must present the reports he submits to the tax authorities in his country of residence that indicate that he does not receive rental income from the real estate he owns. If the seller has a rental income he must attach an affidavit (signed and verified according to the Israeli law) according to which the rental income derives from a real estate asset that is not a residential property.
- The seller (foreign resident) must attach an affidavit (signed and verified according to the Israeli law) that he does not own a residential property in his country of residence.
It should be noted that if the seller’s country of residence is a federal republic such as the United States or a country divided into regions such as Switzerland, the seller’s documents must refer to all the provinces which are part of that state or to all states which are part of that federal republic.
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Note:
This article provides general and preliminary information only and should not be construed in any event as legal counseling and/or as a substitute for legal counseling in respect of any case and its circumstances.
The above should not be relied upon without consulting with an Israeli lawyer before taking any action or making any decision. The above is true as of the date of its composition, and its veracity may change from time to time.
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