Treasury Planning to Tax Profits on Second Homes

The Finance Minister may also tax advanced training funds and redraw the map of the periphery to apply a higher tax rate to more exporters.

The Finance Ministry plans to revoke the exemption for betterment tax on the sale of second homes, according to the Economic Arrangements Bill shaping up for submission to the government.

The treasury is also still considering imposing capital gains tax on advanced training funds and changes to the Encouragement of Capital Investment Law – including changes to the map of preferential regions setting the boundaries of outlying areas for the purpose of the law.

There is agreement within the Finance Ministry on canceling the betterment tax exemption for anyone investing in residential property – meaning anyone owning two or more homes. Under the original proposal, only the sale of an investment home was to be subject to the tax, while the sale of an investor's own residence was to remain exempt. Now, however, the treasury is considering simplifying the process by proposing that anyone owning more than one home be assessed betterment tax on the sale whether it serves as his residence or he rents it to others.

In all likelihood, the betterment tax on investment homes will be imposed starting in January 2014, and the tax will be calculated linearly according to the length of time the home is held. The Tax Authority will assume that the profit accumulated evenly over the years and the calculation will only take into account the period of time the home has been owned since imposition of the tax. For example, if someone bought a home in 2004 and sold it in 2014, tax will be owed only for the last year of ownership – 10% of the profit. The linear calculation is also meant to simplify the collection of tax.

While the treasury is already decided on repealing the betterment tax exemption for investors, disputes remain over the cancellation of other exemptions. The ministry continues to press, for example, for a partial repeal of tax exemptions on advanced training funds, even though such a proposal is likely to be met with severe resistance by the Histadrut labor federation. The treasury is also considering getting by with a limited bite of the funds by not changing the tax benefits on the deposited savings but subjecting the funds to capital gains tax. It believes such a step would save about NIS 1 billion annually in tax benefits.

Another move gaining growing support is reducing tax benefits under the Encouragement of Capital Investment Law. The law currently sets the tax rate on exporters in the periphery at 6% and on those in the central region at 12%, as opposed to the general corporate tax rate – set to rise to 26%. The treasury is considering raising the rates to 10% for outlying regions and to 15% for the center of the country. It also intends to examine the map of preferred regions that sets the boundaries of the periphery for the law and to reduce their area.

Eyal Toueg