Section 88 of the Income Tax Ordinance stipulates that foreign properties are considered ‘assets,’ and the income from the sale is classified as capital income, subject to a capital gains tax rate. In practice, the sale of a property on foreign soil (an apartment abroad, land abroad, etc.) is not considered as ‘property right’ according to the Land Taxation Law. Therefore, it is treated similarly to any other commercial property.
Double Taxation Treaties
The importance of international tax treaties (also known as Double Taxation Treaties) is significant for the country where the properties are located and for the question of whether Israel has signed a treaty to prevent double taxation with that country. Israel has signed approximately 50 tax treaties with various countries. In most cases, when it comes to foreign properties, the primary taxation right goes to the country where the properties are situated. When that country (which has a treaty to prevent double taxation with Israel) imposes tax on the sale of the properties, one should pay attention to the tax rate set by the country of the treaty. As of 2022, the capital gains tax rate in Israel is 25%, but in many cases, it applies to properties acquired before 2002, and a significant part of the tax imposed on them is a surtax of up to 48%. In cases where the tax rate in the foreign country is lower than that in Israel, the seller will pay a proportional rate up to the ceiling of the Israeli tax. On the other hand, if the tax rate in the foreign country is equal to or higher than that in Israel, no additional capital gains tax will be imposed on the seller to avoid double taxation. It should be noted that the additional tax (surtax) is not part of the treaty to prevent double taxation and is always applicable if the annual income exceeds the minimum threshold for the supplementary tax. There are cases in which Israeli residents may be exempt from paying tax, for example, in the case of a returning resident or a veteran returning resident. For more information on the benefits, click here.
When dealing with an international transaction, banks may raise bureaucratic difficulties for property sellers. Proper planning of the property sale process can simplify and expedite the receipt of compensation from the sold property. Our office specializes in and has extensive experience in all matters related to selling real estate abroad. Additionally, our office collaborates with accountants, lawyers, and other professionals from abroad, which can facilitate dealings with sellers in all aspects related to interactions with foreign tax authorities. Important to note that due to Multilateral Instrument (MLI) international tax treaties, there are changes in tax regulations that cannot be found in publicly available agreements online!
The four stages of a successful property sale abroad
To simplify the selling process, it’s important to be aware of the four stages for a successful property sale below.
Important notice – property acquired through inheritance, the process is slightly different. For more information on this topic, click here.
First stage- Tax report in the destination country
You must report in the destination country using a local tax return and pay the tax (if applicable) in the country where the property is located. Our office has extensive connections with foreign accountants in over 100 countries and can refer our Israeli clients accordingly. It is advisable to carry out the reporting to the foreign tax authority in cooperation with a specialized Israeli accountant in international taxation, as it is important to distinguish between expenses that are deductible in each country. For example, in certain countries, expenses related to renovations may be deducted. In such cases, these expenses will not be deducted in the calculation of capital gains in the source country, but in Israel, there may be an option to deduct this cost in the capital gains calculation. This distinction is critical, as in some cases, we have seen that proper calculation significantly reduces the taxes to be paid by over 80%! Collaboration between the local accountant and the foreign accountant can help choose the expenses that will be deducted in each country according to the domestic law of each country and the provisions of the tax treaty.
Second stage – Proving the Process and Obtaining Approvals
In this stage, it is necessary to obtain all the documents and approvals required from the destination country regarding tax payment (if applicable). This stage is required to comply with anti-money laundering regulations and bank compliance requirements.
To complete this stage, you need to obtain the following:
- Sales contract and purchase contract for the property (acquisition of rights if it’s an American LLC or partnership).
- Documentation confirming the payment of taxes in the country of the property’s origin.
- Documentation indicating reporting to the Israeli tax authorities (sometimes a form that indicates a commitment to report is sufficient).
- Preparation of an approval from an Israeli accountant or lawyer to the Israeli bank. This is done to inform the bank in advance that a large sum of money from abroad is expected to be deposited into the account and that there is no concern that the money will be transferred as a result of illegal activity, money laundering or fraudulent activity.
Stage Three – Money Conversion and Transfer
The goal at this stage is to save money, time, and bureaucracy. According to bank instructions, any amount of money transferred abroad goes through an intermediary to verify the source of funds. The bank has 14 days to form an opinion on the transfer’s source and legality. If the source is not confirmed to the bank’s satisfaction, the money may return to the origin bank.
Due to the lack of professional knowledge among bank employees, funds are often sent back abroad, incurring double transfer costs. If the second stage mentioned above is done correctly, it will assist in proving the source to the bank before transferring the funds.
Costs: Aside from the bureaucracy issues, Israeli banks charge significant fees for currency exchange. Most banks claim that the fee for transferring funds is low and that there are no additional fees. However, the main profits for banks come not from the transfer of funds but from their conversion: banks use different exchange rates (“check clearing rate,” “cash rate”), and the differences between them usually amount to more than 2.5%. In less-traded currencies (such as the Hungarian forint), conversion costs can sometimes exceed 5%.
Our office is affiliated with several international money transfer companies with transfer costs standing at 0.5%-0.75% of the official rate. These are companies we rely on, with long and successful experience, that ensure cost-effectiveness, service, and, most importantly, the safety of the funds reaching their destination. The Israeli companies we work with have received approval from the Ministry of Finance to provide currency services, and the international companies we work with for international money transfers hold all required regulations and approvals.
Remember that before transferring funds resulting from the property sale, contact a reliable international money transfer platform to reduce unnecessary bank fees, prepare a lawyer/CPA confirmation for the bank, and confirm the receipt of the funds with the bank.
Stage Four – Reporting and Payment of Taxes in Israel
At this stage, it is necessary to perform a meticulous calculation of real and inflationary capital gains for reporting to the tax authorities and making the tax payment. According to Section 91(d)(1) of the Income Tax Ordinance, reporting to the tax authorities must be done within 30 days from the signing of the sales agreement. Additionally, the applicable tax must be paid.
Calculating the combined capital gains with international taxation is a complex matter and is not part of the standard activities of accountants and tax advisors. The calculation should include the following aspects:
- Referring to an index or currency exchange rate for the purpose of calculating the division between real capital gains and inflationary capital gains. for historical assets, this calculation holds significant meaning; a correct decision regarding the conversion date can save a substantial amount of money. For example, conversion between the German Mark to the Euro and then to the Shekel, or conversion between the German Mark to the Israeli Shekel and so on. Our office works with foreign databases to obtain specific data in this context.
- Calculating the weighted cost for Israeli law. sometimes it significantly differs from the cost according to the law of the source country;
- Distinguishing between inflation-adjusted capital gain and exempt capital gain;
- Consideration of deductions and foreign tax credits.
Our office assists many tax consultants who are members of the Chamber of Tax Consultants and many accountants in calculating the tax for reporting to the Israel Tax Authority. In cases where clients are not represented by a tax consultant or accountant, our office performs the calculation and refers to a tax consultant or accountant for the submission of the report to the tax authorities, and in some cases, even submits the report for clients.
Our office accompanies Israeli sellers through the entire sales process and reporting of assets in accordance with the four stages detailed above, helping sellers to navigate through bureaucracy and maximize returns from the assets, all in a safe and cost-effective way. To schedule a initial consultation phone call with a member of your team, click here.
