Knesset Panel Debates Capital Gains on Earnings From Land

Finance Ministry officials say the tax could bring in around NIS 2 billion in 2014, a further way for Israel to benefit from its natural gas bonanza.

A plan to impose a capital gains tax on foreign investors controlling income-producing land – most notably natural gas and other natural resources – moved a step forward Tuesday as most members of the Knesset Finance Committee signaled they supported the proposal.

"It's unreasonable for foreign investors to be enjoying such a sweeping exemption from large capital gains derived from exploiting the land's natural resources whose rights they have acquired here in Israel," said committee chairman Nissan Slomiansky (Habayit Hayehudi) during the deliberations.

The treasury plan, which is contained in the Economic Arrangements Law, would impose a capital gains tax on foreigners materially benefiting from owning land; for example, via rental income or by exploiting natural resources. The tax would be imposed on profits one step removed from earnings made directly from holding land, like taxing gains from shares in companies whose principal income is from real estate or natural resources.

Under international agreements, foreigners are exempt from Israel's 25% capital gains tax, but a convention Israel is party to under the Organization for Economic Cooperation and Development lets governments tax land as they see fit.

As a result, Israel has the right to designate gains accrued indirectly from land as tax liable, Liat Garber, who heads the Tax Authority's legislative department, told the Finance Committee. She said the new tax would expand the definition of land rights to include earnings from the natural resources underneath.

Finance Ministry officials said Tuesday the tax could generate around NIS 2 billion in revenue in 2014. It's part of a long list of new or expanded taxes Finance Minister Yair Lapid has proposed in the 2013-14 budget to help close a massive fiscal deficit. Many of those new taxes have come under fire as the Knesset takes up debate on the budget.

On Tuesday, the treasury's capital gains tax also elicited concerns among MKs worried that it would deter foreign investment while bringing in relatively little revenue.

Ziv Sharon, representing the Israel Bar Association, said hotels and filling stations might find themselves subject to the tax. Such a significant measure should not be put inside the Economic Arrangements Law but should get its own legislation and Knesset debate, he said.

"We're talking about very small amounts of money," added Ofer Minrav, chairman of the accountants association's tax committee, referring to the forecast revenue from the tax. "Why impose it on a company that has two residential properties or on the sale of shares in a company that has a portfolio of two buildings?"

For his part, Tax Authority chief Moshe Asher said "the exemption on small assets will remain in force, but profits on oil and gas, which entails major capital gains, will certainly be taxed, and foreign residents will no longer enjoy any exemption."

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