According to the draft Law on Arrangements published on Thursday, high-tech companies will pay more than twice the property tax.
In the last 20 years, high-tech companies have enjoyed a reduced property tax compared to offices in other industries. For the past twenty years, high-tech companies in Tel Aviv have benefited from a special “software house placement” provided by the municipality in order to attract young start-up companies. The discount gained popularity and as a result many companies from Herzliya Pituach, Ra’anana, Petah Tikva and Hod Hasharon migrated to Tel Aviv.
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The discount is made by comparing the property tax payment of a software house to that of a small industrial plant up to 200 square meters in size, which pays property tax at a rate of NIS 178.85 per square meter. For comparison, companies that do not receive the classification of a software house or industrial plant pay the normal rate for businesses in Tel Aviv, which ranges from NIS 280.1 per square meter to NIS 409.37 per square meter, depending on the region.
Now it appears from the draft of the Arrangements Law that the classification that allows high-tech companies to pay a low property tax rate will be canceled, and in its place they will pay twice or more higher property tax, according to the rate of offices.
The highest concentration of the companies in Tel Aviv is located in the main business center on the Menachem Begin Vigal Alon axis in Tel Aviv, where the businesses that did not receive property tax discounts pay the highest rate, namely NIS 409.37 per square meter. In other words, the high-tech companies in this area will suffer from a 129% increase in property taxes.
All this is true for high-tech offices that provide software services. High-tech companies in the fields of industry, such as the Intel factories in Kiryat Gat. will continue to benefit from the lower property tax for industry. Who will determine the separation? Where is the difference between services and industry? Here the responsibility will pass to the CBS, which already has the subtleties and problems in its definition of the high-tech industry We published In “Globes”.
The person who is expected to benefit from this the most is the Tel Aviv municipality: Kafi that we published In the past, Tel Aviv has more high-tech companies than the 9 cities after it combined – the Innovation Authority report for 2021 counts 2,383 high-tech companies in Tel Aviv, compared to 2,311 high-tech companies in the 9 cities after it combined. This could lead to a significant increase in property tax revenues of the Tel Aviv municipality, and the other local authorities where there are many hi-tech offices.
Another substantial change in property tax that may affect the municipality of Tel Aviv
This change comes against the backdrop of an even more fundamental change in property taxes, which is expected to actually harm the Tel Aviv municipality: according to the draft Law on Arrangements, starting in 2024, local authorities with a high non-residential property tax collection rate (over an income of NIS 2,000 per capita per year) will begin to pay 49 % of the increase in their non-residential income to a central fund. The fund will distribute the money back to the local authorities according to the number of apartments they approve: for each building permit that actually increases the number of available apartments, the local authority will be entitled to a grant of NIS 2,000 each year. The municipalities will also receive retroactive grants for the permits they gave between 2018 and 2020.
Municipalities like Tel Aviv, which enjoy a particularly high rate of non-residential property tax (46% of the area on which property tax can be collected, in Tel Aviv) will mainly have to pay into this fund, unless they carry out a significant construction boom. This is actually the main goal of the reform. Today, residential construction is critical for the municipality’s budget, because residents pay little property tax compared to businesses, and demand much more municipal services in return. The fund is intended both to push for “distributive justice” between authorities with little and a lot of income from property taxes, and to change the structure of incentives to encourage cities to build as much as possible for residences, thus increasing the supply of housing throughout the country.
The initiative to cancel the software house allowance was also put on the table of the previous government
Although it appears that this is an initiative of the current government to harm the high-tech industry following the recent protest, it should be noted that the initiative to cancel the discounts of the software houses was also brought to the table of the previous government and that in recent years the Tel Aviv municipality has reduced the approvals of the discounts in question. Obtaining a discount at the Tel Aviv municipality became a complex task that often included the use of intermediaries and the judgment behind the property tax officials was not always transparent. Therefore, the assumption has received much criticism.
Paying property tax is not a big expense for a high-tech company. In the past, the high-tech entrepreneur Liyad Agmon, who was appointed last year to a partner in the venture capital fund Insight, claimed that when he managed the Dynamic Yald company he founded, the property tax expenses (after discount) were about 0.24% of all expenses in the company, or about $120,000 per year.
However, Agmon also criticized the method used by the municipality according to him in order to force the companies to accept the discount: to hire a law firm to negotiate for the arbitrary definitions set by the municipality for each company. “The final result: the law firm gets us a discount on a larger part of the area, and legitimately charges a fee of about 40 thousand dollars for the ‘fight’. We are apparently happy because we got a bigger discount, but in reality the frustration is great – why do I have to pay Tens of thousands of dollars for lawyers to defend something I’m entitled to in the first place?”
“What is my recommendation to Tel Aviv Municipality: cancel the discount in property tax for high-tech,” Agmon wrote. “This is a disproportionate and illogical benefit to the richest sector of the economy. Take the extra income and invest in reducing social gaps, in disadvantaged segments – there is a lot of good to be done with these amounts. But until you change the regulations – respect them properly.”