05/20/2014 23:22

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The bill proposing zero-rate VAT for first-time home buyers has rightly attracted much attention because people who served in the IDF would receive preferential treatment.

The bill proposing zero-rate VAT for first-time home buyers has rightly attracted much attention because people who served in the IDF would receive preferential treatment. Other aspects of the proposals may also cause concern.

The undated bill was published last week and is known as the Proposed Value Added Tax Law (Tax Benefit for a Beneficial Residential Apartment Purchase), 2014.

According to the explanatory commentary to the bill, home prices have risen more than 50 percent in recent years, and granting zero-rate VAT would provide relief in the short term, to be coupled with other land-supply measures.

The standard rate of VAT in Israel is currently 18%, but the bill proposals to reduce it to 0% as discussed herein.

What’s proposed? 

The proposals are extremely detailed. There will be a procedure for a government authority yet to be named for checking that a home purchaser meet all the conditions for zero-rate VAT and confirming this within 30 days. The government authority would then issue an official certificate that the purchaser is either a privileged purchaser (rochesh mootav) or an eligible purchaser (rochesh zakai). These certificates would be valid for 180 days.

According to the proposals, a privileged purchaser would be an Israeli citizen and resident paying up to NIS 1.6 million for the home who served the IDF or national service for 18 months if a man or 12 months if a woman (or who applied to do so and was turned down or is an invalid as defined). The home must be 60 to 140 square meters in size.

Individuals must apparently be buying their only home since January 1, 1995. A one-third interest would be ignored.

The zero rate would not apply if the individual bought a home before March 23, 2014, and cancels the purchase between that date and implementation of the proposed law (or uses an option arrangement before the implementation date.) The purchaser or the purchaser’s spouse should be over 35 years old or have at least one child. The individual would need to have resided in Israel in three out of the five years before the purchase or 12 out of the 18 months or hold an aliya (immigration) certificate.

A privileged purchaser would be an Israeli citizen and resident paying up to NIS 0.6m. for the home who did not served in the IDF or national service. In practice, there are hardly any homes in Israel to be had for NIS 0.6m.

Price limits 

The seller or land-rights holder will need to apply to the government authority to check that the home price per meter meets conditions contained in a detailed formula.

The NIS 600,000 to NIS 1.6m. price limits will be subject to additional limits. In particular, it seems the price should be 10% less than the assessed gross value per square meter for land plots in that district. (Comment: How will this work? Will the VAT reduction bring down the assessed gross value in a circular loop?)

Subsequent sale within five years 

Zero-rate VAT eligibility will be retroactively canceled if the purchaser sells the home or part of it within five years.

The purchaser will be obliged to pay the VAT plus interest and indexation within 14 days; failing that, the next buyer may have to.

Are the proposals legal? 

Israel is a sovereign country and the Knesset can enact anything it wants. Or can it? Article 27 of the US-Israel tax treaty reads: “Citizens of a contracting state shall not be subjected in the other contracting state to any taxation or any requirement connected therewith which is other or more burdensome than the taxation and connected requirements to which citizens of that other state in the same circumstances are or may be subjected.”

There is an exception for “personal allowances, reliefs and reductions on account of civil status or family responsibilities.”

There is no exception for military responsibilities.

Israel’s tax treaties with other countries contain similar antidiscrimination clauses. And Section 196 of the Israeli Income Tax Ordinance says tax treaties override any other enactment.

In short, the proposals may be short-lived if they are trumped by Israel’s tax treaties.

Comments 

The bill, if enacted, may provide long-awaited relief for young couples struggling to buy their own home. The proposals are limited and shrouded in conditions, so marathon stamina will be needed.

Immigrants who did not serve in the IDF or national service would apparently miss out on the zero-VAT rate. That could deter aliya. However, foreign residents might have an antidote in Israel’s tax treaties.

If only one spouse served in the IDF or national service, it is not clear what happens.

Since the Israeli housing market is in wait-and-see mode, let’s hope an improved version of the proposals is quickly enacted. The above probably will not be the final word.

As always, consult experienced tax advisers in each country at an early stage in specific cases.

[email protected] Leon Harris is a certified public acc