Dr. Avi Nov, Adv.
September 2015
A recent case law by the Tel Aviv District Court (Leshem vs. Tel Aviv Assessing Officer) clarifies the issue of Israeli tax on rental income from apartments. The question usually asked by many property-owners, including foreign residents that own property here, is how many apartments will be considered passive, under Israeli tax law?
It is generally thought that more than six apartments may result in the entire rental income being taxed in Israel as an active business or trading activity, and less than 6 apartments may qualify for lower tax rates for passive income in Israel.
The tax on rental income
Normally, rental income, in the case of individuals, from property in Israel above an exempt sum of about NIS 5,000 per month can be taxed, provided that it is not business income, at the taxpayer’s selection, either: (a) at a 10% of the total rental income, or (b), at the taxpayer’s marginal tax rate (could reach 50% and more). In contrast to passive income, business income of individuals from property rental, are all taxed at the marginal tax rate of 50% or more. In the case of legal entities such as a company, a standardized company tax rate of 26.5% (planned to be reduced to 25% at January 2016) applies to active and passive income.
The Leshem case
In the Leshem case, the taxpayers received rental income from 28 properties, of which four were business properties and 24 were residential properties. 14 of the residential properties were used for residential purposes. The taxpayers claimed the 10% tax rate on the income received from the residential properties. However, the Israel Tax Authority denied the 10% tax rate, and asserted that the rental income was business income.
The court in the Leshem case dealt with the question - What is business income? The court reviewed the principles for distinguishing between business income and passive income. In the Leshem case, the court concluded that the taxpayers’ activities were similar to the activities of regular and reasonable landlords, and that the number of properties and the amounts involve is irrelevant.
Dr. Avi Nov Law Offices, Israeli & international tax law
*This article is intended for informative purposes only and is in no way to be construed as tax advice or a legal opinion
