I.  INTRODUCTION

There are two laws in Israel which impose tax on capital gains: the fifth chapter of the Income Tax Ordinance imposes tax on capital gains derived from the sale of movable property, and the Land Appreciation Tax Law imposes tax on capital gains from the sale of immovable property. The term "property" in the Land Appreciation Tax Law is defined as land in Israel and all that is permanently attached to it.
The legal structure of all tax laws is identical as they have the same purpose: to impose a compulsory payment on the assessee and to collect money for the exchequer or the local authority. The Land Appreciation Tax Law, like other tax laws, comprises ten elements which are examined below.

II.  THE SUBJECT OF THE TAX: THE ASSESSEE

The subject of the tax is the assessee who is obliged to pay the tax imposed on him. Assessees are required to be either a natural legal personality (namely, a person), or an artificial legal personality (a corporation). Tax may not be imposed on a non-legal personality, such as a business or brand name. If an authority imposes tax on the wrong assessee, the authority may incur loss upon revelation of the error. Under the Land Appreciation Tax Law, the assessee may be an individual or a corporation selling "property rights" or carrying out a transaction in a "real estate company" (Igud Mekark'in), that its all assets are property rights.

III.  THE OBJECT OF THE TAX: GAINS

Tax is imposed on the assessee's gains due to sale of property rights or carrying out a transaction in a real estate land company. The Land Appreciation Tax Law adopts the territorial approach, whereby tax is imposed when property rights of land in Israel are sold regardless of the nationality or domicile of the assessee. The Land Appreciation Tax Law applies also in Judea, Samaria, Gaza and areas of the Palestinian Authority, but solely to Israeli nationals and specific companies. Note that a building contractor dealing in real estate is subject to income tax while sale of property outside of Israel by an Israeli-domiciled individual is subject to capital gains tax.

IV.  THE TAX EVENT: THE DATE OF TAX LIABILITY

1. General

Under the Land Appreciation Tax Law, a tax event is the date of the sale of property rights or of the direct or indirect transaction in a real estate company. This date also establishes the liability of the assessee.

2. Property Rights

The Land Appreciation Tax Law, 1963 defines property rights as being rights of ownership or leasing rights of a lease with potential duration of 10 years or more in equity or in law. It attributes to rights in equity the same meaning as English common law. The Land Law, 1969 regards rights of ownership and leases as being valid only if they have been registered in the land registry, but abolishes the granting of equitable rights as of January 1970. Consequently, the number of those with rights in equity is decreasing.
A sale is an obligatory commitment to sell property rights or lesser rights, such as an obligatory right to obtain property rights, the right to order the owner of property rights to sell them, etc. When defining "sale" the legislators endeavored to include within the scope of this tax any commitment made by the owner of property rights which grant another person an obligatory right in land. The sale of property rights can take place by way of assignment of rights, surrender of rights, granting of an option, the right of first refusal, etc., regardless of whether there was consideration.

3. Rights in a Real Estate Company

By definition, the assets of a real estate company comprise, directly or indirectly, real estate property rights. An ordinary company can become a real estate company by selling its movable property; a real estate company can become an ordinary company by purchasing movable property used for economic and profit- making activities.
A transaction in a real estate company includes the sale of shares, the issue of shares, the deferral of maturity of the shares, changing the rights of shareholders, etc. The Land Appreciation Tax Law is an exception in that it imposes tax on every transaction in a real estate company as if it had sold a "proportionate part" of all the property rights it owns or leases. This proportionate part on whose simulated sale tax is imposed is equivalent to the ratio of the rights in the company that have directly or indirectly been transferred from one shareholder to another, relative to all the rights in the real estate company. When calculating the proportionate part, the following considerations are taken into account: the right to vote in the general assembly of shareholders, the right to appoint directors, the right to receive dividends, and the right to obtain the company's assets during liquidation.

V.  CALCULATING LAND APPRECIATION TAX

1. Value of the Sale

Gains resulting from sale of property rights or carrying out transactions in a real estate company are taxable under the Land Appreciation Tax Law. The sum of profits is calculated by deducting the value of the purchase and certain expenses from the sale value of the property right. When the Chief Officer of the land appreciation tax (hereinafter: the C.O.) considers the contractual price fixed by the parties lower than the market value of the property sold, he is entitled to set the sale value at a different price, unless persuaded that the contractual price was fixed in good faith and no special relation exists between the parties.

2. Allowable Expenses

 The Land Appreciation Tax Law provides for a finite list of allowed deductions of expenses. A precondition for approval of these expenses is that they are non-deductible under the Income Tax Ordinance. When an expense which may be deducted from income has not been deducted, the land appreciation tax assessment will not permit its deduction.
Principal expense deductions are:
  1 . expenses for the betterment of the property being sold, i.e., for building on the assessee's owned or leased plot;
   2 . expenses for purchasing of possession, i.e., payment of protected tenants' eviction costs as prescribed by the Tenant Protection Law;
  3 . purchase tax, i.e., tax paid when purchasing property;
  4 . broker's fees, i.e., amounts paid to the broker for purchase and sale of property. Up to 2% of the purchase and sale value is deductible;
  5 . lawyers' fees, i.e., amounts paid to lawyers for purchase and sale of property;
  6 . property tax, i.e., amounts paid as property tax on account of property sold;
  7 . consent fees, i.e., the sum paid by the assessee to the land owner for the letter's consent to sell lease rights; and
  8 . betterment levy i.e., the amount paid to the local authority due to a rise in the property's value pursuant to approval of a city zoning plan which allows additional construction on the property. The betterment imposition is paid to the local authority either when receiving the building permit or at the time of property sale.

3. Effect of Inflation on Tax

 When computing the amount of tax, the inflationary decrease in the value of the shekel is taken into account. Each month the Central Bureau of Statistics publishes the previous month's Israeli inflation rate, and the tax calculations are based on it. This calculation is carried out by linking the value of the purchase to the Consumer Price Index from date of purchase until date of sale. In the same fashion, all deductible expenses are index-linked from occurrence until sale date. The gain derived from reduction of the purchasing power of the shekel is called "inflationary gain," and the remainder of the gain is called "real appreciation." 10% of the inflationary gain accrued until 31 December 1994 is liable to tax; the balance is exempt.
 When a foreign resident purchases property in Israel and with permission from the controller of foreign currency pays for same in foreign currency, he may request to take into account the devaluation in shekel value instead of linking the purchase price to inflation. The inflationary gain of a foreign resident may be calculated at the assessee's discretion either according to the value of the foreign currency used to purchase the property or according to the local rate of inflation.

4. Tax Rates

 The tax rates imposed on real appreciation correspond to the progressive tax rates imposed on taxes not derived from personal exertion, amounting to a maximum of 50% of the real appreciation per individual and 36% per company. If the property right was purchased prior to 31 March 1961 the entire nominal appreciation will be liable to a reduced tax rate. If the property right was purchased by 31 March 1949 the tax rate is 12%. The tax rate grows by one per cent every year until it reaches 24% where the property right was purchased by 31 March 1961.
 Tax rates for a transaction in a non-Israeli real estate company may be affected by the double taxation treaties which Israel has with most western countries. This situation facilitates the creation of varied tax havens by means of purchasing property in Israel through foreign companies that are liable to the low tax rates of the country in which they are registered and in accordance with the double taxation treaty which Israel has with that country.

VI.  DATE OF PAYMENT OF TAX

1. General

 The date of payment of land appreciation tax is 15 days after the issue of the assessment by the Chief Assessing Officer. This date may be postponed until one of the following three conditions is fulfilled:
  1 . transfer of possession of property to the purchaser;
  2 . payment of more than 50% of the agreed price; or
  3 . vendor grants purchaser irrevocable power of attorney enabling registration of the property right in the purchaser's name.

2. Linkage, Interest and Fines

 The amount of the land appreciation tax is calculated according to the purchase day or day of effecting a transaction in a real estate company. To this amount are added consumer price index linkage differentials and a 4% annual interest charge beginning 30 days after the tax event and continuing until date of payment. If the assessee chooses to submit a self-assessment and to pay tax accordingly, the linkage differentials and interest are calculated beginning 50 days after the tax event.
 Any person not submitting a tax declaration or being late in payment is subject to a fine. While objections are being raised or appeals lodged relating to the imposition of tax or tax rate, no fine will be imposed as the tax sum is in dispute, but the debt is index-linked and accrues interest.

 VII.  EXEMPTIONS AND DISCOUNTS

1. General

 All tax laws grant exemptions and discounts. Some assesses are entitled to exemptions and reductions, some tax events are granted exemptions and reductions, and sometimes a combination of the two is available or necessary.
 There are transfers in property rights that are not regarded as sales or transactions in a real estate company and to which the Land Appreciation Tax Law does not apply, e.g., bequests and the transfer of property in the course of a divorce. There are also sales and real estate company transactions that are exempt from land appreciation tax. A distinction should be made between "real exemptions" that allow the realization of capital gains without the payment of tax, and "apparent exemptions" that defer the payment of tax until the next sale. The principal examples of "apparent sales" are listed below. The exemption is generally for the entire tax amount; when a partial exemption is granted it may be called a discount.

2. Apparent exemptions

The following are subject to apparent exemptions:
  1 .  transactions subject to income tax;
  2 . gifts to the State of Israel, local authorities, Jewish National Fund, and public institutions as approved by the Minister of Finance;
  3 . gifts from an individual to a relative;
  4 . waivers of right without consideration;
  5 . expropriations, when the consideration is a property right;
  6 . property exchanges due to an order of a competent authority;
  7 . division of property between joint owners;
  8 . transfer of property from trustee to beneficiary;
  9 . the transfer without consideration of property rights to a real estate company by the owners of property rights in the aforesaid company; and
  10 .  the transfer without consideration in the course of liquidation of a company to  shareholders.

 3. Real exemptions

Real exemptions include:
  1 . sale of a property right by public institutions, as approved by the Minister of Finance; and
  2 . sale of a residential apartment. This exemption is the most common and important tax haven in Israeli tax law.

VIII.  THE DUTY TO MAKE A DECLARATION

 Every seller and purchaser of a property right and any person carrying out a transaction in a real estate company is obliged to make a declaration thereof within 30 days of the sale date or from the date of carrying out the transaction. The assessee may submit a "self-assessment" and pay tax according to the self-assessment; this must be done within 50 days. The declaration is submitted on a special form. The parties to the transaction must sign the declaration even if living outside of Israel. However, it is possible to sign it abroad in the presence of an Israeli lawyer or an Israeli consul.

IX.  THE TAX ASSESSMENT

1. General

 The tax event creates an imputed liability for the assessee. In order to determine the tax sum, an assessment must be made. It is the duty of the Chief Land Appreciation Tax Officer (CO) to carry out the assessment. The assessment act converts the imputed liability into a practical liability. Following the assessment, an assessment notice is issued to the assessee, which must be drawn up according to certain rules and must contain all the elements of the assessment. In addition it must inform the assessee of his right to appeal the assessment.

2. Temporary Assessments, Final Assessments and Assessment Corrections

 The CO may issue a temporary or final assessment in accordance with the assessee's declaration, whichever the former deems more appropriate. The CO alter the temporary assessment within a certain time frame or issue a final assessment, according to his discretion. Only in exceptional circumstances may a final assessment be amended. When a self-assessment is submitted and tax is paid accordingly, and the CO does not issue an assessment within six months pursuant to the presentation of the self-assessment, it becomes a final assessment.

3. Artificial or Fictitious Transactions

 When the Chief Land Appreciation Tax Officer considers that a declared transaction is artificial or fictitious, the sole purpose being to avoid or reduce the payment of taxes, he may ignore the data presented in the sale agreement and declaration and issue a final assessment subject to his discretion. In such circumstances it is incumbent upon the CO to justify his deeming the declared transaction artificial or fictitious. A fictitious transaction may incriminate the declaring parties while an artificial transaction is an authentic transaction whose declaration describes real facts of a transaction so constructed as to minimize tax. A fine line separates legitimate tax planning and artificial transactions.

X.  OBJECTIONS AND LODGING APPEALS

 Tax is a mandatory payment imposed by public authorities. The law allows the authorities to impose tax and permits the assessee to oppose the tax rate or the actual imposition of tax.
 With respect to land appreciation tax, a person may raise an objection to the CO's assessment within 30 days of its being rendered. This administrative stage enables the CO and the assessee to re-examine the tax assessment with each side afforded the opportunity to present his position.
 Should the assessee remain dissatisfied after the re-examination, he may within 30 days lodge an appeal against the CO's decision. The appeal is submitted to an Appeals Committee which has the authority to decrease or nullify the land appreciation tax liability, but not to increase it.
 In a third stage, either the assessee or the CO may lodge an appeal against the Appeals Committee within 45 days of its making a decision. The Appeal is filed at the Supreme Court which is authorized to examine matters of law only. It may not examine factual findings of the Appeals Committee.



 XI.  TAX COLLECTION METHODS

 Land appreciation tax may be collected using the Tax (Collection) Ordinance. There are several means by which the tax authorities can guarantee the fulfillment of the duty to make an honest declaration and to pay tax which is due:
  1 . a person not declaring a transaction, not declaring within the allotted time or making an untruthful declaration will be subject to an administrative fine;
  2 . late payment of tax leads to the imposition of an administrative fine;
  3 . these above actions and omissions are criminal offenses which may lead to an indictment, however, under certain circumstances these may be converted into a payment levy in lieu of judicial process;
  4 . a property transaction is completed when registered in the Land Registry and so approved by the CO; and
  5 . a land appreciation tax debt is a first mortgage upon the property in question.

XII.  CONCLUSION

 The Land Appreciation Tax Law is regarded by jurists as being complicated and complex. This chapter cannot therefore, teach the investor how to find his way through the labyrinth of the law. It does, however, provide the reader with a helpful overview.
 The complexity of the law requires stringent tax planning before purchasing and selling property. When a foreign resident is making a property purchase he should examine the double taxation treaties Israel has signed with many countries. Not all tax planning is legitimate, and the CO may ignore an artificial transaction and register it as if it had been carried out in what he deems to be the natural way.