Updates for 2023 on VAT in connection with Activity in Commercial Real Estate: a New Reportable Position and New Case Law

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Updates for 2023 on VAT in connection with Activity in Commercial Real Estate: a New Reportable Position and New Case Law

31 January 2023

Dear clients and colleagues,

With the start of 2023, we would like to inform you about the past year’s changes and updates related to Value Added Tax (VAT) in the field of commercial real estate, as follows:


Reportable Tax Position

A Dealer, whose annual turnover exceeds NIS 3 million, and financial institutions are required to file a report, if they have taken a position during the past year which conflicts with a position published as a reportable position. The report must be filed within 60 days from the end of the tax year in which such position was taken.

A reportable position for VAT purposes is a position that contradicts a position published by the Israel Tax Authority as a reportable position, provided that the tax advantage derived from such contradicting position exceeds NIS 2 million a year or NIS 5 million in a period of 4 years.

On December 28th, 2022, the Israel Tax Authority published its reportable position list, including a new position related to VAT.

The new position deals with the Israel Tax Authority’s implementation of Section 5(b) of the Law, which provides that if a dealer in the real estate business purchases an apartment from a private person for the purpose of selling it to another, the “Transaction Price” is the difference between the apartment’s purchase price and its sale price. The reportable position clarifies that the Israel Tax Authority’s position is that the said relief will not apply if the purchased apartment is demolished and the land is being sold, the purchased apartment is demolished and a new apartment that was built in its stead is being sold, or in case of a sale of an apartment for which there is a demolition plan, a demolition request was filed or a demolition permit or order was received.

Attached for your convenience is a link to all reportable VAT positions. We recommend reviewing all positions to ensure that you are not obligated to submit any report.

° To a list of all reportable VAT positions >> Click here


New Case Law with respect to VAT in Real Estate

The Domostroy Ruling (issued on December 1st, 2022) – the Supreme Court’s ruling reversed the District Court’s ruling and accepted the State’s appeal. The ruling discusses the implications of a company that registered as a Dealer but did not manage to establish a business. The court ruled that a company that purchased a building to convert it into a hotel must be recognized as a Dealer, even if it eventually rented the apartments for residential and other purposes – an activity which in itself does not constitute a “Business” – and there is no future possibility to establish a hotel. The court expressed its concern from a wide adverse implication to Dealers, if a business failure will lead to a retroactive disqualification of the Dealer status, which will require the Dealer to repay the input tax it already deducted.

The Amiel Levy Ruling (given on January 2nd, 2023) – the Supreme Court accepted the Israel Tax Authority’s position that the appellant is a “Dealer” for VAT purposes and rejected the appeal. The judges debated whether the “Overall Circumstances Test” should be used to determine whether a business exists only in the most exceptional cases and the “Overall Circumstances Test” is supposed to reflect the conclusion arising from the other judicial tests, or whether the implementation of the “Overall Circumstances Test” should not be limited only to exceptional cases.

The Michelle Yaacobi Ruling (given on July 13th, 2022) – the Tel Aviv-Yafo District Court ruling accepted the Israel Tax Authority’s position and rejected the appeal. The court ruled that an “Organizing Entity” for the purposes of defining a “Purchasers Group” regarding real estate taxation and VAT, can be only responsible for the preparation of the contractual framework regarding the groups organization and plan of action, and there is no need for the Organizing Entity to actually execute matters during the construction itself.

° To the Domstroy Ruling >> Click here

° To the Amiel Levy Ruling >> Click here

° To the Michelle Yaacoby Ruling >> Click here


Updates in Real Estate VAT matters

Dear friends and colleagues, with the end of the 2022 tax year we hereby update you regarding changes in Israeli VAT with respect to real estate activity.

Reportable Position number 14/2022: The tax liability resulting from the sale of an apartment according to Section 5(b) of the VAT Law

° For the full text of the Reportable Position >> Click here

Section 5(b) of the VAT Law, 5736-1975 (“VAT Law”) provides tax reliefs to the secondary apartments market. According to the section, in a case where a real estate Dealer purchases an apartment from a private person for the purpose of selling it afterwards, the “Transaction Price” will be the difference between the purchased apartment’s price and the sale price, unlike the regular rule stating that the “Transaction Price” will be the full price of the subsequent sale.

The position lists several cases in which the abovementioned relief will not apply. The reasoning is that these cases essentially describe the purchase of an apartment for the purpose of selling a new apartment and not the secondary trade of apartments.

The Situations are:

• The Dealer Demolishes the purchased apartment, and then sells the land

• The Dealer Demolishes the purchased apartment, then builds a new apartment and sells it.

• The Dealer sells the purchased apartment in cases where the apartment is subject to a plan of demolition, a demolition request was made, or a demolition permit/order was issued.

Please note that the above situations are broadly phrased and there can certainly be some “gray” cases, like a partial demolition of an apartment, a demolition order that is not executed and etc.

We recommend receiving legal advice if there is any concern that an action listed in a reportable position was or is taken, and in general with respect to any issue or required clarification relating to reporting. It should be emphasized that failing to report an action included in a reportable position constitutes a criminal offense over failure to report, and with respect to VAT assessments that are issued following a failure to report a reportable position a deficit penalty can be imposed.

We will be happy to assist with any questions/clarifications required.


Important court rulings with respect to VAT on real estate

1. The Domostroy court ruling (CivA 5188/20 Tel Aviv Central VAT Director v. Domostroy Contracting Company for Construction and Development Ltd.)

° For the full ruling >> Click here

The ruling discusses two persons with expertise in real estate who established a company to purchase a building in order to convert it into a hotel. The company registered for VAT started advancing the hotel’s construction plans and deducted input tax. In the meanwhile, the company rented out the apartments in the building for residential and other purposes. Following a regulatory change, the company concluded that there will be no chance to receive any construction permit for the hotel in the near future. In response, the company requested to retroactively close its VAT file and repay the deducted input tax. Its request was refused.

The ruling in the appeal of the company was issued by judge Abraham Gorman of the Central District Court (TaxA (TLV) 27953-11-18 Domostroy Contracting Company for Construction and Development Ltd. v. Tel Aviv Central VAT Director – click here for the full ruling). The District Court accepted the company’s appeal. In its ruling, the court examined the “business tests” and determined that the renting of the apartment does not constitute a business and under the unique circumstances created following the regulatory changes, the business hasn’t “matured” enough to become a real business and the company’s registration in for VAT should be deleted retroactively and the company should repay the input tax.

The Israel Tax Authority appealed to the Supreme Court. The court did not dispute the District Court’s decision that the rental of the apartment isn’t a business. Yet the Supreme Court disagreed with the District Court’s conclusion and determined that:

“As long as the Respondent worked in good faith to promote the plans to establish the hotel, the terms required to define it as a Dealer existed and so the reason for its registration as a Dealer continued to exist. Only when the plans were fully and permanently neglected, the reason stopped to exist, and from that date forward there was a basis for the deletion of the registration. There was no indication of the abandonment of said purpose until the day the respondent’s cancellation of the registration request was submitted. Therefore, there is no justification for the exercise of the authority to cancel it in a way that will retroactively apply to an earlier date, and certainly, there is no justification to cancel the registration from the beginning…”

The court also mentioned that the retroactive deletion of the registration when the business has failed may have far-reaching implications against the Dealer, for example, in matters related to input tax deducted up until the point the business closed.


2.The Amiel Levy Ruling (CivA 1533/20 Amiel Levy v. VAT and Customs Department Petah Tikva)

° For the full ruling >> Click here

The ruling discusses an appellant that engaged into several transactions in real estate that he owned, including 4 different sale transactions of a property in Hod Hasharon to a group of four purchasers, and a sale transaction of real estate in Pisgat Ze’ev in Jerusalem by the appellant and the two co-owners in the real estate.

In addition, the appellant owns many properties with respect to which he engaged in several transactions over the years. The respondent issued a tax assessment of the transactions in question since each one constituted, in his opinion, a separate transaction. The Appellant’s objection (administrative appeal) was rejected, and he subsequently appealed to the District Court which also rejected the appeal and accepted the Israel Tax Authority’s opinion.

The issue in question is how these transactions should be classified – as transactions made within the framework of a business activity, or as transactions made within the framework of a capital investment. A comprehensive analysis of the “Business Tests” was made, which eventually led to the majority opinion, contrary to the dissent opinion of Judge Khaled Kabub, that the appellant is a Dealer in real estate.

In the ruling a principal disagreement arose between Judge Khaled Kabub and Judge Solberg regarding the last of the “Business Tests”, which is the Overall Circumstances Test. In light of the importance of the statements made by the judges, we shall quote Judge Kabub’s description of the disagreement:

“Therefore, the Overall Circumstances Test is the ‘glue’ that sticks the mosaic’s pieces together – the rest of the auxiliary tests – which reveals to the court, the Israel Tax Authority officials and the taxpayer the general picture arising from the taxpayer’s economic activity… it cannot be denied, that in certain cases the Overall Circumstances Test will not properly reflect the conclusion arising for the implementation of the rest of the auxiliary tests. These circumstances may arise in one of two events:

• The first, when the auxiliary tests pull to different directions, and the Overall Circumstances Test is required as a ‘tie breaker’.

• The second, when the auxiliary tests lead to a clear conclusion, but other circumstance justify, on the surface of things, a deviation from it.

I personally believe that the appeal to wide standards that damage the certainty of the fiscal law should be avoided as much as possible; and that it is required to prioritize the rest of the auxiliary examinations, which are meant to assess the different aspects of a financial activity. Justice Solberg disagrees with me in that regard, on two aspects: first, in his opinion, my position “throws out the baby with the bathwater”, since the Overall Circumstances Test is a vital tool to ‘capture’ all the elements of the transaction being examined; and since its reduction may incentivize purposeful clinging to the rest of the auxiliary tests to achieve ‘formal classification… in order to escape the tax’s cloves’ (Paragraph 32 to his ruling)…

I will not deny that my approach is innovative, and Justice Solberg rightfully mentioned, that my decision isn’t walking ‘in the road plowed by previous ruling of this court’ (there, in paragraph 31). Yet, in my opinion, it is a wanted innovation…”

The court further decided that the approval the taxpayer received from the Real Estate Taxation Department of his self-assessment, in which the transactions were classified as capital transactions, does not prohibit the Israel Tax Authority (VAT Department) from classifying the transactions as business transactions when no full assessment was made by the Real Estate Taxation Department that approved the taxpayer’s self-assessment.


3.The Michelle Yaacobi Ruling (TaxA (TLV) 39498-06-20 Michelle Yaacobi v. VAT Director Tel Aviv 1)

° For the full ruling >> Click here

The ruling discusses the VAT liability on the acquisition of land by a Purchasers Group. VAT Law defines a purchase of land from a private person by a Purchasers Group as a “Transaction” liable for VAT. Regarding the definition of a “Purchasers Group”, VAT Law refers to the  Real Estate Taxation Law (Appreciation and Purchase), 5723-1963 (the Real Estate Taxation Law”) which defines a Purchasers Group, under Article 1, as follows:

“A group of purchasers organized for the purchase of a right in real estate and the construction on the land of a property which falls within one of the definitions below, through an organizing entity, provided that the group’s purchasers are obligated by a contractual framework –

• A property that is not a residential apartment

• A property which is an apartment intended for residential use”

An organizing entity is defined in Real Estate Taxation Law as:

“Whoever operates, by himself or through another entity to organize the Purchasers Group for the purpose of purchasing and constructing, including preparation of the contractual framework, all in return for a consideration for said organizational activities”.

Under the circumstances of this case it was decided that the Organizing Entity that organized the Group, organized it up to the actual construction phase, including drawing up contracts and advertising the land units but during the actual construction phase, the Group’s members operated individually to construct the apartments. Accordingly, the question that arose was whether under these circumstances the organizer falls under the definition of an Organizing Entity, and accordingly the group itself will be defined as a Purchasers Group whose sale of land is liable for tax in any case, or whether an Organizing Entity is only an agent engaged with the buyers up to the point the apartment is actually delivered.

The court answered this question and decided that an Organizing Entity will be classified as a Purchasers Group even if the Organizing Entity acted only to organize the purchasers up to the construction phase. This was articulated by the court as follows:

“It arises from the wording of the law that the Organizing Entity must organize the Purchasers Group, and not [organize] the purchase and construction themselves. It is not for nothing that the words ‘Including preparation of the contractual framework’ appear. Preparation of the contractual framework is enough to organize the Group and its plan of action, and there is no need for the Organizing Entity to also execute these elements.

This also arises from the linguistic definition of the word ‘Organizer’. On the Hebrew Academy’s website an ‘Organizer’ is defined as ‘an organizer and arranger, who gathers people into a gathering”. Meaning, it’s enough that the same Organizer organizes and arranges the group and gathers the individuals into an organization, and there is no need for him to execute the functions as well, like communicating with the sub-contractors himself and such”.

These rulings discuss issues that should be reviewed considering the specific circumstances of the relevant case. Our firm has great expertise in the field of taxes, including matters of VAT in general, and more specifically VAT in connection with real estate. We will be glad to be of service to you with any issue arising in these domains, and any question or clarification.    

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