TheMarker on the Neve Gad Ruling: VAT on the Residents' Attorney Fees

TheMarker reported on 13.11.2023 about a ruling by Judge Yardena Seroussi of the Tel Aviv District Court, which held — contrary to the position of the Israel Tax Authority — that a development company engaged in urban renewal is entitled to deduct the VAT on legal fees it pays to the residents' attorneys. According to the article, in large-scale projects these legal fees amount to millions of shekels, and the VAT on them reaches hundreds of thousands and more.

According to the article, in 2010 Neve Gad entered into a clearance-and-rebuild (Pinui-Binui) project together with another company in the Kfar Ganim neighborhood of Petah Tikva. A total of 360 apartments were built across four buildings; the 89 existing residents received new apartments and the remainder were sold to the public. As is customary in Pinui-Binui projects, the company paid the legal fees of the residents' attorney.

The appeal concerned NIS 5.7 million and involved three issues. On two of them — the timing of the tax liability (against the backdrop of a 2014 amendment to the VAT Law) and the method of calculating deductible input tax — the judge ruled in favor of the Tax Authority. TheMarker notes that the bulk of the appeal was dismissed, and the company was therefore ordered to pay costs of NIS 90,000.

On the third issue, the judge accepted the company's position. The Tax Authority argued that the legal services were provided to the residents and that the company was not a party to the engagement agreement with them. The company argued that, like raw materials and construction services, the residents' legal representation is a necessary project expense that it had undertaken to fund.

The judge held that relocation and moving services also serve the residents yet are still considered "construction services"; that without the company's funding the project would not have materialized; and that the developer is the appropriate party to which the input tax should be attributed. According to the article, this constitutes only a small portion of the disputed amount, but the ruling is relevant to all companies engaged in urban renewal.

According to the article, Neve Gad was represented by Adv. (CPA) Shlomi Vaknin and Adv. Ariel Epstein. Vaknin told TheMarker that the ruling implements the purpose of the law, which was designed to encourage urban renewal developers through tax benefits that make projects economically viable, and that the services encompass all costs borne by the developer in order to bring the project to fruition.