New Tax Law Crushes Small Commercial Real Estate Investors
Translated & summarized from Globes by baba
A new Israeli tax law, the "trapped profits" law, is severely impacting small and medium-sized commercial real estate investors. The law forces companies to pay annual taxes on undistributed profits or distribute dividends, significantly reducing net returns to below 3%. This is causing financial hardship, eroding equity for developers with bank loans, and is expected to lead to market consolidation favoring large corporations.
The story in 5 lines · by baba
- A new Israeli tax law is causing severe financial distress for small commercial property investors.
- The "trapped profits" law mandates taxes on undistributed profits or dividend payouts.
- Effective tax rates have risen to nearly 50%, slashing net rental returns to under 3%.
- Developers with bank loans face eroded equity due to profit distribution requirements.
- The law is expected to drive private investors out, consolidating the market under large corporations.
While major Israeli real estate companies are reporting stable rental income and even slight increases, smaller private investors and business owners who purchased commercial properties are facing severe financial struggles. This crisis is largely attributed to a new tax law, dubbed the "trapped profits" law, which took effect in January 2025. The legislation, originally intended to combat "shell companies" and tax deferral by professionals, is now significantly impacting legitimate small and medium-sized businesses.
The law targets companies with up to five shareholders and an annual turnover of up to 30 million shekels. It mandates either a 2% annual tax on undistributed profits or requires companies to distribute at least 6% of accumulated profits as dividends each year. Tax authorities are reportedly considering increasing this annual tax to 8%, which could be a fatal blow to many businesses.
This new tax regime has effectively raised the tax rate for these property owners to nearly 50%, reducing the net return on office rentals from a seemingly attractive 6%-7% to less than 3%, insufficient to cover mortgage payments. The impact is particularly harsh retroactively, as many developers who took out bank loans and committed to financial covenants are now seeing their equity eroded by the requirement to distribute or pay extra tax on accumulated profits. This situation creates a snowball effect with banks, potentially leading to a crisis.
Industry veterans warn that the private players in the small and medium commercial real estate market (under 1,500 square meters) will likely disappear within a few years. This consolidation will concentrate power in the hands of large real estate corporations, leading to price hikes for small businesses renting these spaces. Unlike large companies, REITs, and institutional bodies that have lobbyists and complex tax structures, small developers are being pushed out of the market, with some facing additional annual taxes of around 160,000 shekels on a 5 million shekel property, effectively wiping out their returns.