TA 68651-05-22 A.C.Y. Real Estate Ltd. v. VAT Director Tel Aviv
The Tel Aviv District Court ruled on May 9, 2024, that a company that purchased real estate together with its shareholders and allocated future building rights to them from the outset did not sell those rights to them when they materialized. The VAT assessment of NIS 1,480,805 in tax principal was canceled, and the VAT Director was ordered to pay costs and attorney's fees of NIS 95,000. Adv. Shlomi Vaknin represented the company, together with Adv. Ariel Epstein.
Court: Tel Aviv-Jaffa District Court, Judge Yardena Seroussi.
Proceeding: TA 68651-05-22, judgment dated May 9, 2024.
Counsel for the Appellant: Adv. Shlomi Vaknin andAdv. Ariel Epstein.
Assessment: NIS 1,379,190 in tax principal, increased upon objection to NIS 1,480,805.
Outcome: The appeal was granted.
Judgment: Summary and citations in the LexDin database.
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What Were the Facts?
In April 2015, the Israel Land Authority published a tender for a plot of approximately 1,191 sq.m. at 23 Shimshon Street in Jerusalem, with a building designated for preservation on it. The company, wholly owned by the Yochman couple, submitted a joint bid together with them. In an agreement signed between them on May 14, 2015, before the tender was won, it was stipulated that the company would purchase the building, the gardens, and 470 sq.m. of building rights, while the couple would purchase the remaining existing rights and all future rights, including those under TAMA 38. The purchase cost was divided at a ratio of 80% for the company and 20% for the couple, based on an appraiser's valuation.
The bid won the tender for approximately NIS 25.5 million plus VAT. The company deducted input tax on its share, approximately NIS 3.7 million, while the couple, who purchased for private use, did not deduct. Subsequently, the couple were approved for an additional 608 sq.m. under TAMA 38, and in August 2019 a joint construction agreement was signed under which each party bears 50% of the construction costs.
In December 2020, the VAT Director of Tel Aviv issued an assessment. According to his position, the gap between the land cost allocation (80:20) and the construction cost allocation (50:50) indicated that the company had sold 30% of the rights in the real estate to the couple.
What Did the Court Rule?
There Was No Additional Transaction
The joint purchase agreement allocated the TAMA rights to the couple before the acquisition. According to Supreme Court case law relied upon by the judge, an express waiver of the future rights was required, and no separate payment for them was necessary. The court added that even if the real estate had been acquired in undivided co-ownership and subsequently divided, the allocation and partition process itself does not constitute a transaction for VAT purposes, and the respondent's representative conceded this point during cross-examination.
The 80:20 Ratio Reflects Cost Allocation, Not Area Allocation
According to the judgment, this is where the VAT Director erred. A conditional right is worth less per square meter than a vested right, and therefore the couple paid approximately 20% of the price for rights that ultimately materialized in a larger area. The court found the price allocation to be reasonable and did not intervene.
Even If There Had Been a Transaction, It Was Time-Barred
Such a transaction, if it occurred, took place in 2015, at the time of the purchase agreement and the winning of the tender. All documents, including the joint purchase agreement, were filed with the tax authorities in real time, and therefore there was no impediment to issuing an assessment within five years. The court distinguished between the date on which the tax liability arose and the date of the transaction, ruling that the limitation period begins from the date of the transaction.
At the same time, the judge clarified that the judgment was not intended to open the door to manipulations. In transactions between related parties, a price allocation that does not correspond to the area allocation must be scrutinized, but this must be done in real time and not by means of a belated, unfounded transaction.
What Does This Mean for Companies and Shareholders Purchasing Real Estate Together?
Set out the allocation of rights, including future rights such as TAMA 38, in an agreement signed before the purchase.
Retain the appraiser's valuation on which the price allocation was based. It explains why the payment ratio differs from the area ratio.
Report the agreement to the real estate taxation authorities together with the purchase. In this case, real-time reporting formed the basis for the statute of limitations ruling.
A subsequent construction agreement at a ratio different from the purchase ratio may trigger scrutiny, as happened here.
A district court judgment is not binding on other courts, but it demonstrates how the court examines such claims. For planning transactions of this kind, see Taxation of Complex Real Estate Transactions. If an assessment has already been issued, see Objection to a VAT Assessment. Press coverage of the case: Globes on the Yochman Ruling. For VAT on land transactions, combination deals, and TAMA 38, see VAT on Real Estate Transactions and Urban Renewal.
