VAT Deduction on Tenants' Attorney Fees in Pinui-Binui: The Neve Gad Ruling

The Tel Aviv District Court ruled on November 9, 2023, that a developer in an evacuation-reconstruction (Pinui-Binui) project may deduct the input tax on the invoice of the attorney representing the tenants, as the legal representation is part of the construction services the developer provides to the tenants. The appeal was largely dismissed: it was accepted only regarding the attorney's fees, while the VAT Director's position was upheld on the tax liability date and the calculation method. The company was ordered to pay NIS 90,000 in costs. Adv. Shlomi Vaknin represented Neve Gad.

• Tel Aviv-Jaffa District Court, the Honorable Judge Yardena Seroussi.

• The project: Residential buildings on Yosefsberg, Ben Zvi, and Katz streets in the Kfar Ganim neighborhood of Petah Tikva.

• Case status: On January 29, 2024, the VAT Director filed an appeal with the Supreme Court (CA 914/24), and our firm represents Neve Gad in the appeal as well. The appeal is pending.

• Full judgment (PDF)

Neve Gad is the developer of a Pinui-Binui (evacuation-reconstruction) project in Petah Tikva. As in many transactions of this type, the developer funds the attorney representing the apartment owners, even though the developer is not a party to the fee agreement. Neve Gad deducted the input tax on the attorney's invoices. The VAT Director of Tel Aviv Center disallowed the deduction, arguing that the services were provided to the tenants rather than to the company.

The appeal addressed three issues: the date of the tax liability in the transaction, the method for calculating the deductible input tax, and the deduction of the attorney's fees.

• Tenants' attorney fees: Deduction allowed. The court held that there is no fundamental difference between the attorney's fees and other payments the developer bears for the benefit of the tenants, such as evacuation, moving, and temporary housing costs. All of these are included in the construction services, and the input tax on them is deductible on a proportional basis in a transaction that is partly exempt.

• Calculation method: Based on the area ratio. On this point, the VAT Director's position was upheld. The company had deducted based on the income ratio (89.5%), but the court ruled that the developer does not derive income from construction services provided to the tenants, and therefore the income-based test is inappropriate. The deductible portion was determined according to the ratio of the developer's built area to the total project area.

• Tax liability date: The date of receipt of consideration. In such a transaction, the consideration is received no later than when the developer takes possession of the land to commence construction, not upon completion of construction. Accordingly, the company's argument that Amendment 47 applied to Phase 2 of the project was rejected.

• Costs: NIS 90,000 imposed on the company. The appeal was largely dismissed, and therefore Neve Gad was ordered to pay the VAT Director's costs and his counsel's fees.

According to the ruling, a developer in an urban renewal project may deduct input tax on the tenants' attorney fees and similar expenses paid on their behalf, in the proportional share attributable to the apartments the developer sells. The ruling was issued by a district court, and the state has appealed. It is therefore advisable to document the connection between each expense and the Pinui-Binui agreement, and to prepare for the possibility that the VAT authorities will challenge the deduction.

The ruling also addresses the reporting date in Pinui-Binui transactions. For assistance with such transactions: Taxation of Complex Real Estate Transactions. For more on VAT in Pinui-Binui, combination deals, and TAMA 38, see also VAT in Real Estate Transactions and Urban Renewal.

1. Review the Pinui-Binui agreement to identify which tenant expenses you bear: attorney fees, evacuation, moving, and alternative rental costs.

2. Ensure that the tenants' attorney's invoices are on file and that a proportional calculation based on area ratios has been prepared.

3. If the VAT authorities disallowed the deduction, check the deadline for filing an objection. For more information: VAT Refunds and Input Tax.