Your Taxes: Proposals To Rebuild REITS Leon Harris

Your Taxes: Proposals To Rebuild REITS Leon Harris

The Israeli Tax Authority (ITA) has just announced that it is working on a draft bill to improve the Israeli tax regime for Real Estate Investment Trusts (REITS).
A REIT is a publicly traded entity that enables the public to collectively participate in various types of investments linked to real estate without having to purchase the property directly.
The present Israeli regime dating back to 2006 is very restrictive. Only two REITS have been formed in Israel. Given the need to bring down the cost housing, the government hopes that REITS can play a more useful role by removing tax obstacles.
What Does The Present Tax Law say?
According to the 2006 provisions, a REIT must be a company incorporated in Israel, and its business must be controlled and managed from Israel; its shares must be listed and marketed on the Tel Aviv Stock Exchange within 12 months after incorporation; at least NIS 200 million must be invested in real estate—at least 75 per cent in Israel; at least 90 per cent of income must be distributed by April 30 after year end; and shareholders are taxed on such distributions at source at full rates instead of the REIT company. At least 50% of the REIT must be owned by five or more shareholders. Various other conditions also apply.
Income distributed to shareholders by a qualifying REIT will be taxed as income of the shareholders, not of the REIT, and tax will be withheld at source accordingly.
However, short-term capital gains realized within four years will be taxed at ordinary income tax rates (ranging up to 50 per cent currently) and “exceptional income” will be taxed at a deterrent rate of 70 per cent. Exceptional income is income from sale of business inventory and any other income not from real estate, publicly traded securities, state bonds or deposits if it exceeds a minimum threshold of 5 per cent of total income.
Israeli provident funds and retirement funds resident in a country that has a tax treaty with Israel may be exempt from Israeli tax.
 
What’s Now Proposed?
First, it is proposed that founders of a REIT who transfer assets they own to a REIT for shares in the REIT can defer Israeli tax until they sell the shares, or until the REIT sells the assets. The ITA claim this will clear away a key tax obstacle.
Comment: If the REIT sells the asset, the founder must pay the tax out of other cash resources even if the sale was beyond his control. Moreover, foreign investors may suffer double taxation if no foreign tax credit is allowed in the investor’s home country because the asset sale by the fund is not a taxable event in that country.  The tax obstacle remains in our view.
Second, REITs may be allowed to buy land zoned for construction of rental housing and to develop it, not merely invest passively in income yielding properties.
Moreover, the REIT may be allowed to borrow up to 80% of the value of their residential rental property holdings, compared with 60% under present law.
Furthermore, the Israeli tax rate would be only 20% for income and capital gains from residential housing.
Comment: This may not help foreign investors who may have to “top up” the tax to the level in their home country.
Third, the founders will be given 5 years to gradually get at least 50% control into the hands of 5 or more shareholders.
To Sum Up:
These proposals probably won’t improve housing supply nor bring down housing prices…..but t remains to  be seen what will be finally legislated.
As always, consult experienced tax advisors in each country at an early stage in specific cases.
(C)
leon@hcat.co
The writer is a certified public accountant and tax specialist at Harris Consulting & Tax Ltd.
March 24, 2015

Font Resize
Contrast