Globes on the Neve Gad Ruling: Developers May Deduct VAT on Residents' Attorney Fees

Globes reported in November 2023 that the Tel Aviv District Court ruled, contrary to the position of the Israel Tax Authority, that developers in urban renewal projects may deduct VAT on the legal fees they pay to the residents' attorneys. The appeal was filed by Neve Gad Building and Development Ltd., and according to the article, the company was represented by Adv. Shlomi Vaknin.

According to the article, the company, together with another company, initiated an evacuation-reconstruction (Pinui-Binui) project under a combination transaction with 89 residents, in the block of Yosefsberg, Ben Zvi, and Katz streets in Petah Tikva. The old buildings were demolished and replaced by four new buildings of 90 apartments each. The residents received new apartments, and the remaining units were sold to the public. During construction, the residents were relocated to alternative housing, and the company also bore the legal fees of their attorneys.

Globes notes that the ruling contradicts a tax decision published by the Professional Division of the Israel Tax Authority in June 2018, according to which services provided to residents must be invoiced in the residents' names even when the developer pays for them. Until then, according to the article, developers had for years received the invoices in their own names and deducted the VAT.

Judge Yardena Seroussi ruled that there is no fundamental difference between the legal fees of the residents' attorneys and other payments borne by the company for the benefit of the residents, such as relocation and housing in alternative apartments. According to the judgment, as quoted in the article, the construction of the consideration apartments and the construction of the developer's apartments are interdependent, and the legal services provided to the residents are part of the expenses necessary to carry out the project.

Adv. Vaknin told Globes that the Tax Authority's position, which was also reflected in assessments issued to developers, undermined the viability of projects and the legislative purpose. According to him, the law established zero-rate VAT on construction services in urban renewal and allowed the developer to deduct VAT on expenses.

Two additional tax experts were also quoted in the article. One estimated that the ruling would save developers VAT amounting to tens of millions of shekels, and noted that a developer who retroactively amends VAT reports would also need to amend income tax returns. The other emphasized that this is a district court ruling, and that in its wake it is important to review the fee agreements between the developer and the service providers of the residents.