The decision last week by US President Donald Trump in the House and Senate to lower corporate tax rates is expected to have a significant impact on Israeli real estate companies operating in the United States.
The lowering of the tax rate will affect every Israeli company operating in the US, but in the case of real estate companies, the effect is more significant because they are allocating huge sums to tax reserves, ie, the tax they will have to pay if they sell their assets. The real estate companies operating in the US, such as Big, Gazit Globe, Aviv Arlon, Electra Real Estate and Mishorim, are expected to record huge profits of hundreds of millions of shekels.
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These are not cash flows (real money entered), but accounting profits in the financial reports, but this has a considerable impact on the net asset value of the companies and, to a certain extent, on their pricing in the capital market. The House of Representatives and the Senate approved a reduction in corporate tax from 35% today to 20%.Trump and the House of Representatives want the change to take place in 2018, while the Senate wants to postpone it to 2019.
Calcalist said the biggest impact would be on Gazit Globe, the commercial center company of Chaim Katzman and Dori Segal, which operates in the US, and is expected to record a one-time profit of NIS 385 million when the law is implemented.
Gazit Globe‘s tax reserves amount to NIS 900 million. This number is actually the difference between the fair value of the assets, ie, the value at which they are recorded in the books, and the cost at which they were purchased. Gazit Globe’s tax reserves are expected to decrease to NIS 515 million in the balance sheet.
Another company that is expected to be affected is Big Shopping Centers, which operates in the United States through its subsidiary, Big USA. Big is expected to record a one-time profit of NIS 145 million ($ 40 million) as a result of implementing the new regulations.
Big has tax reserves of NIS 255 million, which are expected to decrease in line with the tax cut.
Another company that will be affected is Mishorim, led by Gil Blutrich and Alex Schneider, which operates directly in the US and through its subsidiary (3.46%) Skyline.
Mishorim has 12 income-producing properties in the US at a fair value of NIS 305 million, while their acquisition cost is NIS 216 million, a NIS 89 million gap.
Therefore, its tax reserves, which are attributed to US operations, are NIS 31 million, so its expected profit from the change in the tax rate is NIS 13 million, and its share in the subsidiary Skyline, which holds hotels in the US, is expected to contribute an additional NIS 20 million a million shekels.
Aviv Arlon, the real estate company of the Aviv and Arlon families, owns nine shopping centers in the United States, with a total area of 185,000 sq.m.
Aviv Arlon has tax reserves in the financial reports of NIS 65 million – one million euros come from Serbia and all the rest of the United States. The profit it is expected to record due to the tax change is NIS 20-25 million.
Electra Real Estate has made a change in the past two years and has become a multi-family investment fund in the US for Elco. The company records in its reports tax reserves of NIS 27 million.
The reserves are set aside at a rate of 38% (not 35%, following a decision by the Company’s management to increase reserves), and therefore it is expected to record a profit of NIS 12 million when the plan is implemented.
Will Israel’s corporate tax be lowered soon?
American real estate companies that raised bonds in Israel will also be affected by the change. To date, 28 companies in Israel have raised more than NIS 20 billion in bonds. They are expected to record one-time profits as a result of the reduction in the tax rate, which will help them meet various financial covenants towards bondholders.
But not only the companies operating in the US are expected to be influenced by the Trump decision, but also those that operate only in Israel.
Prime Minister Benjamin Netanyahu said at a cabinet meeting this week that Israel is expected to follow suit. “The United States made a decision last night to lower taxes,” Netanyahu said. We are in a global world. We must not fall short of the ease we give to the business sector – both in taxes and in regulation and in limited bureaucracy.”
Israel’s corporate tax is currently 24%, and is expected to fall by 20% in 2018. According to estimates, Netanyahu will announce a reduction in the tax rate by another three stages, up to 20% in 2021. If this happens, the impact on Israeli real estate companies is expected to be enormous.
The White House last week reached an understanding with Republican lawmakers about the tax reform, Trump announced about 10 months ago. Trump presented the program in a speech in Indiana and said: “It’s time to take care of our people, and rebuild the American nation.”
According to the plan introduced by US Treasury Secretary Steve Menuchin last April, the corporate tax rate was expected to fall to 15 percent. Trump’s plan also states that a new tax rate of 25 percent will be imposed on business owners who have until now paid ordinary income tax, which sometimes reached the maximum rate of 39.6 percent.
In addition, the number of income tax brackets imposed on individuals will be reduced from seven to three, as determined in the plan presented in April.
The lower tax rate will be 12% (compared with 10% in the plan from April), and in the remaining two steps the tax rate will be 25% and 35% (unchanged from April).
Today, the tax rate at the top level is 39.6%. However, the new plan stipulates that an additional tax rate of more than 35 percent is possible so that the new tax system will be no less progressive than the existing one.
In addition, the reform includes a significant increase in the amounts under which tax will not be paid, from $ 6,350 to $ 12,000 for individuals, and from $ 12,700 to $ 24,000 for married couples.
By Oren Froind, Calcalist (In Hebrew)