A REIT is considered a flow-through entity for Israeli tax purposes. Accordingly, a REIT will generally not be subject to corporate level tax on income it distributes to its shareholders. Instead, the income will be attributed to its shareholders, and will be taxed at the shareholders’ level.
All dividends paid by a REIT, whether to Israeli investors or foreign investors, will generally be subject to withholding taxes. The rate of withholding will depend on the nature of the investor receiving the distribution and on the character of the underlying income being distributed.
Dividends paid to a corporation, whether Israeli or foreign, will generally be subject to withholding taxes at a rate of 26.5% (in the 2014 tax year). For this purpose, a corporation generally includes any foreign entity characterized as a corporation or company in its country of formation, such as, for example, a United States limited liability company (LLC), even if such foreign company is characterized as a flow-through entity in its country of formation.
Dividends paid to an individual, whether Israeli or foreign, will generally be subject to withholding taxes at a rate of (a) 25% (in the 2014 tax year) if the amount being distributed is attributable to capital gains or the REIT's depreciation expense or (b) 48% (in the 2014 tax year) if the amount being distributed is attributable to ordinary taxable income. It is expected that a portion of the annual dividends to be paid by the Habira Group REIT will be classified as distributions attributable to depreciation expense, and therefore will be subject to the 25% withholding rate.
Israeli tax law also imposes a 25% withholding tax on real capital gains (i.e., gains above inflation) recognized in connection with a sale of REIT shares.
Tax Implications for the Investor
Foreign investors receiving distributions subject to Israeli withholding taxes may be entitled to a tax credit in their country of residence for the taxes withheld. A foreign investor that is not able to receive a credit in its country of residence for the Israeli taxes paid, may be eligible to file an Israeli tax return and receive a refund for all or a portion of the amount withheld.
This information is based on current Israeli tax ordinances and on the understanding of the tax ordinances by Habira Group and its tax advisors. Note that the Israeli Tax Authority may not agree with and is not bound by the conclusions stated above. Foreign investors are strongly urged to consult with their own tax advisors regarding the tax consequences of investing in an Israeli REIT. In addition, Habira Group will endeavor to make its tax advisors available to answer any questions with respect to Israeli taxation, including any foreign investor's eligibility to file an Israeli tax return and receive a refund of any tax withheld.