Tax Obligations, VAT, and Business Arnona

This guide provides general legal information for educational purposes only and does not constitute legal advice. Always consult a licensed attorney in Israel for advice specific to your situation. Information last verified: October 2024.

Governed by the Contracts (General Part) Law, 5733-1973 (effective August 28, 1973), specifically the duty of good faith in negotiations under Section 12, managing the residentialPreview unavailable side involves taxation aspects specific to dwelling units. Under the Income Tax (Exemption from Tax on Income from Renting a Dwelling Unit) Law, 5750-1990, residential rental income is eligible for a full tax exemption up to 5,654 ILS per month (for the 2024 and 2025 tax years). If income exceeds this ceiling, a partial exemption applies using a sliding scale formula, or a 10% flat tax track may be chosen under Section 122 of the Income Tax Ordinance.

1. Value Added Tax (VAT) Exemption for Residential Leases

A critical distinction for residential property owners is the tax-exempt status of rent. Unlike commercial transactions:

• A residential lease transaction is exempt from VAT for periods of not more than 25 years, per Section 31(1) of the Value Added Tax Law, 5736-1975 (excluding hotel accommodations).
• Drafting the Price: In residential rentals, the price quoted is the final price. There is no requirement to add VAT to the monthly rent.
• No Dealer Registration: Residential landlords are not required to register as a "Dealer" with the VAT authorities or issue tax invoices for exempt residential rent. The "Invoice Israel" signature regulations for business entities do not apply to standard residential leasing.

2. Residential Arnona (The Local Authority)

Another essential topic is the Local Authority's tariff for residential areas under the Municipalities Ordinance [New Version].

• Under Section 274B, local authorities must classify properties by use, and residential rates are strictly separated from commercial or business rates.
• The Arnona (Municipal Tax) for residential properties in major cities typically ranges from 45 to 90 ILS per sq.m. per year, which is significantly lower than the rates applied to banks, restaurants, or offices.
• Who pays? The tenant! The general conditions section in your contract should stipulate that all Arnona payments and municipal charges imposed on the possessor of the property apply to the tenant.
• Warning: If a tenant vacates the property without properly transferring the municipality account back to the owner or a new tenant, the debt may return to the owner. Therefore, landlords should ensure the account transfer is completed at the start and end of the lease term and protect themselves with security depositsPreview unavailable.

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