Treasury Plans VAT Exemption for Urban Renewal Programs

Developers using the Tama 38 and Pnui-Bnui schemes would get a tax break on construction and other work.

Emil Salman

The Finance Ministry plans to extend to exempt from value-added tax entrepreneurs undertaking renewal projects in urban areas, according to the draft amendment to the VAT law now being circulated.

The amendment would entitle contractors upgrading buildings through the government’s Tama 38 and Pinui Binui programs to exemptions from the 18% tax, for construction and demolition work. It would substitute for the current tax break they get, which offers them a tax reduction.

“These breaks are being introduced as part of efforts by the Finance Ministry and the Tax Authority to encourage urban renewal projects with the goal of increasing the supply of homes and encouraging the reinforcement of buildings against earthquakes,” the Tax Authority said in a statement.

The government has been scrambling to rein in Israel’s rapidly climbing housing prices. The centerpiece of its efforts is a plan to exempt buyers of new homes from VAT, a plan that was approved by ministers earlier this week, and to make arrangements with contractors to sell them land at a discount so long as they pass the savings on to home buyers.

The Tama 38 plan, first introduced in 2005, allows building owners to strike deals with contractors to give them additional building rights in exchange for reinforcing older buildings against earthquakes. The Pinui Binui program creates a framework for tenants of older buildings to be rehoused while their homes are demolished and rebuilt, with the contractor receiving building rights for apartments he can sell.

The treasury proposal does not grant home buyers in the urban renewal schemes any kind of VAT exemption, although those who qualify for the home-buyer VAT exemption can apply it to properties they purchase through the two urban renewal programs.

That program is limited to couples with at least one child or are over age 35, and have served in the army or civilian national service. They are entitled to buy a home worth up to 1.6 million shekels ($460,000), while those who don’t meet those criteria can buy a home worth up to 950,000 shekels.

Amit Perah, chairman of the land division of the moshav movement, on Tuesday called for the treasury to extend VAT exemptions to people building their own homes on moshavim and kibbutzim in rural areas.

“Tens of thousands of young couples who grew up in settlements meet the exemption requirements of having served in the army, pay their taxes, have married and are now raising children — and want to build their first home in a rural area far from the center of the country,” he said calling the fact that they have not been included in the exemption program an act of “discrimination.”