Foreign Resident Purchase Tax — Complete Legal Guide

What is Purchase Tax for Foreign Residents?

Purchase tax is a tax levied on the acquisition of assets in Israel, including apartments, houses, and land. When the purchaser is a foreign resident — meaning a person who is not a resident of Israel for income tax purposes — a different purchase tax rate applies, typically higher than that applicable to Israeli residents. The exact rate depends on the type of asset, the purpose of the purchase (personal residence versus investment), and the resident's status (whether he or she is in the process of establishing residency or not).

Israeli purchase tax law and tax regulations impose on a foreign resident the obligation to report the purchase, pay the tax upon closing of the transaction, and maintain accurate documentation. Failure to comply with any of these may result in delays in the process, penalties, or even cancellation of the transaction.

Legal Definition of Foreign Resident

According to Israeli tax law, a foreign resident is any person not considered a resident of Israel for income tax purposes. This includes foreign nationals who do not hold an Israeli identity card, Israelis living abroad for more than 183 days in a calendar year, and anyone not registered as a resident in Israel with the Tax Authority. Typically, a foreign resident purchasing a property in Israel must prove his or her status through relevant documents, such as a passport, foreign residency certificate, or a letter from the Tax Authority.

Why Are Purchase Tax Rates Higher for Foreign Residents?

Israeli legal policy imposes higher tax rates on foreign residents to encourage purchases by residents and to protect the local real estate market from external fluctuations. Additionally, foreign residents do not contribute to the Israeli tax system on an ongoing basis (annual income tax), and therefore the State derives substantial revenue through higher purchase tax. This also reflects a general principle in tax law worldwide: taxes on transactions in local assets are imposed at a higher rate on foreign purchasers.

Purchase Tax Rates for Foreign Residents — Reference Table

Purchase tax rates in Israel vary according to the type of property, the purpose of purchase, and the resident's status. Below is a table showing the typical rates:

Important Note: These rates are general guidelines only. Each case is reviewed individually based on specific circumstances, resident status, purchase purpose, and additional conditions. Rates may change due to legislative amendments or changes in tax authority directives. It is recommended to consult with a real estate law attorney before proceeding with a purchase.

Purchase Tax Calculation — Practical Example

For a better understanding, let's go through a practical example of calculating purchase tax for a foreign resident:

Scenario: A foreign resident purchases an apartment in Tel Aviv valued at 2,000,000 NIS for personal housing purposes.

• Property Value: 2,000,000 NIS
• Purchase Tax Rate: 8% (personal housing for foreign resident)
• Calculation: 2,000,000 × 0.08 = 160,000 NIS
• Total Payment Due: 160,000 NIS

In addition to purchase tax, a foreign resident must also pay:

• Capital Gains Tax: If the property is land or a building that has increased in value (typically 25%–50% of the value gain)
• Land Registry Registration Fees: Approximately 300–500 NIS
• Legal Fees: Attorney consultation, title verification, etc.
• Inspections and Reports: Engineering report, mortgage eligibility check, etc.

Therefore, the total cost of purchase for a foreign resident may be substantial — sometimes 12%–15% of the purchase amount or more, depending on the circumstances.

Can Discounts or Reductions Be Obtained?

In certain circumstances, it is possible to obtain a discount or reduction in purchase tax:

• Residency in Process: If a foreign resident is in the process of obtaining Israeli residency, they may be able to benefit from a reduced rate (up to 5%) under certain conditions
• Urban Renewal Projects (TAMA 38): Buyers in certain urban renewal projects may be entitled to a tax rate reduction
• Married Couples: In certain circumstances, married buyers may be entitled to a discount or reduction
• Securities and Investment Law: In some cases, foreign investors participating in government investment agreements may be entitled to special discounts

However, each case depends on its circumstances, and discounts are not automatic. A formal request must be submitted to the tax authorities and advance approval obtained.

Purchase Process for Foreign Residents — Steps and Laws

Purchasing real estate in Israel as a foreign resident involves a complex legal and tax process. Below are the main steps:

Step 1: Document and Evidence Preparation

Before signing a purchase agreement, a foreign resident must prove their status as a foreign resident. This requires:

• Valid passport
• Confirmation of residency outside Israel (issued by the Tax Authority or Israeli embassy)
• In certain cases, confirmation from the Ministry of Interior or Ministry of Social Affairs regarding residency status
• Bank confirmation (typically from a foreign bank confirming the source of funds)

Step 2: Signing the Purchase Agreement

The purchase agreement must contain a clause clearly stating that the buyer is a foreign resident. This affects the tax rate and its calculation. Typically, an attorney or professional broker prepares the agreement with the consent of both parties.

Step 3: Title and Registry Verification

Before closing the transaction, the land registry (title deed) must be checked to ensure the property is not subject to liens, mortgages, or claims. This verification is critical for protecting the buyer.

Step 4: Opening a Tax File with the Tax Authority

A foreign resident purchasing property in Israel must open a tax file with the Tax Authority. This requires submitting Form 101 or a similar form, along with proof of residency status and property details.

Step 5: Tax Calculation and Payment

Based on the property's value, type, and purchase purpose, the tax authorities calculate the purchase tax amount. Payment must be made before closing the transaction in the land registry. Typically, payment is made through an attorney or authorized broker.

Step 6: Land Registry Registration

After tax payment and verification of all documentation, the Land Registry Office registers the buyer as the new owner in the title deed. This is the final step in the purchase process.

Step 7: Capital Gains Tax Liability (if applicable)

If the property is land or a building that has increased in value, a foreign resident may be liable for capital gains tax. This is a tax on the profit made by the previous property owner, calculated as a percentage of the gain between the purchase price and the sale price.

Professional Legal Advice — Mandelbaum, Gor, Witzman-Gor & Co.

Purchasing real estate in Israel as a foreign resident is a complex legal transaction that requires deep knowledge of property law, tax law, and regulation. Our firm, Mandelbaum, Gor, Witzman-Gor & Co., Attorneys at Law, specializes in property and real estate law in Israel and has over 18 years of experience representing clients in complex transactions.

We provide comprehensive legal advice regarding purchase tax for foreign residents, including:

• Preliminary assessment of your status as a foreign resident and discount or relief options
• Accurate calculation of purchase tax and additional costs
• Preparation of all required documentation and forms for the tax authorities and land registry office
• Full support throughout the purchase transaction, from signing the agreement to registration at the Land Registry
• Handling of tax claims and response to authorities when necessary
• Advice regarding ongoing tax obligations as a property owner in Israel

The firm is located in Ramat Gan and we have an additional branch in Petah Tikva. We offer a free initial consultation meeting to understand your needs and propose a tailored legal solution. Contact us today to schedule a meeting or ask any questions.