Israel To Close Group Purchase Tax Loopholes

by Lorys Charalambous, Tax-News.com, Cyprus

28 June 2010

An Israel Tax Authority report has recommended reducing tax benefits for purchasing groups, and Finance Minister Yuval Steinitz proposes to incorporate the recommendations in the Economic Arrangements Bill for 2011.

Purchasing groups currently have a tax incentive to join together in housing projects rather than buying apartments singly from a contractor - groups are exempt from paying the normal rate of purchase tax and value-added tax (VAT) on their dwellings.

Groups do not pay VAT on land bought for private dwellings, as well as paying 1% less in purchase tax, because the tax is only on the land and not the construction costs. In addition, groups benefited from lower marketing costs, competitive bank financing and reduced contractor's profits - although organizers of the groups charge fees.

The Tax Authority proposes levying VAT for purchasing groups on the apartments, but not on the land. It also recommends raising the purchase tax on second homes from the current 3.5% to 5%, equal to purchase tax on land.

The groups have grown steadily in number, such that last year 20% of all residences in Israel and, in Tel Aviv, more than a third were built by purchasing groups.

It is argued that, since homes built by buyer groups tend to be luxury apartments, they should be taxed at a higher rate. The recommendations also included a closer focus on organizers of purchasing groups so that their income could be taxed as business income, and mechanisms for monitoring apartments to ensure that tax benefits apply to homes that become residences of the buyers rather than investments.

Uriel Lynn, president of the Israeli Chambers of Commerce, commented in response to the Tax Authority recommendations:

"The Tax Authority's conclusions regarding purchasing groups are an unnecessary declaration of war on... the establishment of group buyers of residential buildings. Assumptions on which the Israeli Tax Authority has based its conclusions are incorrect. The structure and essence of each transaction needs to be studied on a case by case basis. It should be borne in mind that, according to the Tax Authority's own report, purchasing groups play an important part in reducing housing costs."

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