Real Estate Associations

Many investors mistakenly believe that selling shares in a company holding real estate is a standard "capital transaction" subject only to capital gains tax (25%). In practice, Israeli law treats a company whose primary assets are rights in real property as a "real estate association" (Igud Mekarkein). The implications are dramatic: the Tax Authority "pierces the corporate veil" and treats the sale of shares as if the property itself were sold. Without proper planning, you may face full betterment tax (Mas Shevach) and purchase tax, and may even be exposed to a "tax accident" involving double taxation (at both the corporate level and the shareholder level) upon realization of the assets or liquidation of the company.

The Real Estate Taxation Law establishes a unique regime for a "transaction in a real estate association":

1. Transaction Taxation: The seller pays betterment tax (Mas Shevach) (rather than capital gains tax), and the buyer pays purchase tax (based on the proportional value of the real estate). The major advantage typically lies in theVAT exemption on the sale of shares — a significant advantage compared to a direct real estate transaction involving a commercial property.

2. Association Dissolution (Section 71): The law provides a unique procedure for transferring the apartment or property from the company to the shareholders with a tax exemption (tax deferral), subject to strict conditions. This is a critical tool for owners of block/parcel companies who wish to convert the property to private ownership.

3. Tax Calculation: Expertise is required in calculating the betterment, while neutralizing non-real-estate assets (such as cash and securities) to avoid paying excess tax.

Our firm handles purchase and sale transactions of shares in real estate associations, leveraging the VAT advantage and planning the purchase tax. Additionally, we are experts in conducting voluntary dissolution of real estate associations (under Section 71) — a procedure that enables "extracting" assets from the company to the owners with minimal tax, while ensuring compliance with the complex reporting requirements to the Tax Authority and the Registrar of Companies.