A foreign investor may invest in Israeli real estate directly, or through an Israeli or foreign company or partnership.
Rental income accrued or derived in Israel is taxable in Israel under the Israeli Income Tax Ordinance.
Rental income is recognised for tax purposes either on the accrual basis or on the cash basis, according to the status of the taxpayer and the scope of the activities. However, passive rental income, including such income received in advance, is generally taxable on a cash basis. Rental income from an active rental business operation is generally reported on an accrual basis.
In principle, expenses, but generally not of a capital nature, are deductible against rental income if they are incurred wholly and exclusively in the production of taxable income, e.g. insurance, maintenance, property management. A withholding tax (WHT) of 25% may be imposed, subject to any tax treaty reduction, in the case of certain overseas expenditures, such as interest on borrowings. Alternatively, a foreign lender who incurred proven costs in the course of its earnings of such interest income can request to pay tax at regular rates on its net margin.
Source : PWC