US President Donald Trump is proposing to build beautiful new homes for Gazans. It is not yet clear whether the homes will be in Gaza or in neighboring Arab countries. But the Trump Organization has developed many real estate projects in the US since 1973. In the 50 year before that Trump's father Fred did so.
Suppose Israelis were able to participate in Trump's construction projects, what would the anticipated Israeli tax consequences be? And how does the new Israeli tax law regarding "trapped profits" fit in?
This is not a political article, it merely discusses Israeli tax aspects if Israelis are able to join in Trump's proposed rebuilding project, if it takes place. The same rules apply to projects within Israel.
Territorial issue:
Israel taxes its residents on their worldwide income. Israel also taxes its residents and citizens as well as those entitled to become Israeli citizens on their income from an administered "Area" as if such income was derived in Israel (ITA Section 3A). Such an Area includes: Judah and Samaria and the Gaza Strip, including areas controlled by the Palestinian Authority. Any tax due to a local authority in such an Area is creditable against Israeli tax like a foreign tax credit.
Trapped Profits Law Exception:
The new "trapped profits" tax law (Income Tax Ordinance Amendment 277) became effective in Israel on January 1, 2025. It increases Israeli taxes on past and present corporate profits. But the new law preserves existing substantial Israeli tax breaks for "Institutional Rental Buildings" (IRB) under Section 53A(A)(3A1) of the Encouragement of Capital Investments Law, 1959.
This is because an IRB is excluded from the definition of "special assets" which would otherwise trigger a 2% surtax on past retained profits of a closely held company. Investing in non-special assets (i.e. business assets) is therefore a way of mitigating this surtax.
About the IRB:
An IRB should have at least 10 homes for rent generally, or 6 homes if the building is in a prescribed peripheral area. Size rules aim to prevent artificial splitting of homes. Approval of an IRB must be requested from the Israeli government's Investment Center before the end of construction, by the end of 2031.
The Investment Center board must be satisfied that the homes are to be rented out on average 15 years out of 18 years after the end of construction. To obtain tax breaks, the homes must be rented out on average 5 years out of 6 after rental begins.
Rental and sales gains of companies in qualifying cases may be initially taxed at 11%, potentially decreasing to 9% after 5 years rental, 7% after 10 years rental, 5% after 15 years rental. Dividends are taxable at 20% subject to any applicable tax treaty.
Rental and sales gains of individuals in qualifying cases may be initially taxed at 29%, potentially decreasing to 27.5% after 5 years rental, 25.5% after 10 years rental, 24% after 15 years rental.
There are also rules facilitating long term rentals of homes for at least 20 years, but capable of termination annually and each 5 years by the tenant apparently.
Israel has other tax breaks for industry and hitech which are apparently not yet on the Trump agenda for Gazans.
Onward sales:
To preserve future IRB tax breaks after a sale, it seems at least 50 homes must be sold to a purchaser who undertakes to continue with these conditions and is approved by the Investment Authority. Sales should be exempt from VAT. Purchasers who continue with these conditions may pay only 0.5% purchase tax on their purchase.
Comments:
Potentially, the IRB rules offer an interesting public-private housing solution for evacuees and others. The IRB regim may potentially apply anywhere in Israel and the Gaza Strip for Israeli landlords. Mitigating the "trapped profits" high tax regime is an added bonus.
Developers and investors in Israeli residential real estate should consider these tax breaks for helping Israeli evacuees who lived in Northern or Southern Israel. Rebuilding Gaza would obviously be more difficult.
Foreign investors should also check the tax situation in their home countries.
Is the Trump rebuilding plan realistic?
We tried visiting www.trump.com and got the reply: "Thank you for visiting. We're currently experience (sic) a high volume of traffic, please check back soon".
To sum up, after the war, an economic solution is called for. Rebuilding homes as proposed by Trump is one possibility. Developing the Gaza Marine gas field, as proposed in the past, might help pay for it all.As always, consult experienced tax advisors in each country at an early stage in specific cases.
leon@hcat.co
The writer is a certified public accountant and tax specialist at Harris Consulting & Tax