The Aura Ruling in Calcalist: VAT on a Developer's Public Obligations

In an article published in Calcalist in April 2025, Adv. (CPA) Shlomi Vaknin and Adv. Ariel Epstein, who represented Aura Investments, explain what the Tel Aviv District Court ruled on February 13, 2025, in Tax Appeal 62970-03-22 regarding the imposition of VAT on a developer for development works and public buildings carried out under a statutory plan. According to the article, the court partially allowed the appeal and reduced most of the tax assessment.

The authors note that VAT on a service applies only when work is performed for the benefit of another party in exchange for consideration. According to CA 41/96 Cassuto and CA 8119/06 Yevulei HaGalil, not everyone who benefits from work is the recipient of the service; the dominant interest must be examined. According to the article, when a developer performs development works that are the local authority's obligation, and the authority waives levies and fees in return, the developer is providing it a service. Public buildings and educational institutions are different, because responsibility for their funding lies with the central government, and in CA 9142/02 Kfar Vradim it was held that their construction does not constitute a service to the municipality.

The case concerned the "Ono VeAli" urban renewal (Pinui-Binui) project in Kiryat Ono. Under an updated statutory plan, the company relocated two kindergartens to another location within the complex and converted an above-ground public parking facility into an underground one, built an envelope for a public building for the municipality, and agreed to fund a NIS 1 million renovation of a nearby school as compensation for the inconvenience caused during construction. According to the article, the company paid all applicable fees and levies.

The VAT director argued for two forms of consideration: statutory approvals, such as a building permit, occupancy certificate, or Form 4; and rights the company received under a land consolidation and redistribution plan.

According to the article, the court rejected both consideration arguments. It held that a local authority may not trade in statutory approvals and therefore they do not constitute consideration, and that rights obtained through consolidation and redistribution do not constitute consideration for the works. The authors also present a key ruling that the relocation of existing public infrastructure carried out solely for the developer's needs does not constitute a service to the municipality.

However, the court found that the kindergartens and parking facility were rebuilt to a higher standard and on a larger footprint, and therefore the municipality benefited from the construction. As consideration, the court identified the municipality's consent to the demolition without requiring the company to pay for the reconstruction — an argument that, according to the authors, the VAT director never even raised. The building envelope and the school renovation were also subject to tax. The authors note that with respect to these two items the judgment does not specify what the consideration was, and that in their view, when new public buildings are erected without demolishing existing ones, there is no consideration and therefore no service.