Taxation of Combination Transactions, Pinui Binui, and TAMA 38

In a combination transaction, the landowner sells part of the land to a developer, and in return the developer builds apartments for the landowner on the portion that remains in the landowner's hands. The landowner pays capital gains tax (mas shevach) on the portion sold, and the value for tax purposes is determined according to the value of the construction services. The developer pays purchase tax (mas rechisha) on that portion and VAT on the construction services. In urban renewal projects — Pinui Binui (evacuation-construction) and TAMA 38 — tenants enjoy special exemptions under Chapters 5(4) and 5(5) of the Real Estate Taxation Law.

Send us the draft agreement with the developer, and we will review its tax implications before signing.

It is best to consult before signing, while the consideration in the agreement can still be changed:

• A developer has offered landowners a combination agreement, and they want to know how much capital gains tax they will pay on the portion they sell.

• Apartment owners in a building are asked to sign a Pinui Binui agreement and want to know whether the new apartment falls within the exemption ceiling.

• A TAMA 38 strengthening transaction is being signed in a building, and the tenants are also offered an expansion, an elevator, or a cash payment.

• A developer wants to request advance confirmation that the transaction terms qualify for exemptions, before the date of sale (Section 49KA(c)).

• You are granting or receiving an option to purchase land and want to know whether its sale will be subject to capital gains tax (mas shevach) or income tax.

• The VAT director is demanding that the developer pay tax on services to tenants, on expenses paid on their behalf, or on public infrastructure obligations.

The answer depends on the type of transaction: combination, Pinui Binui, or TAMA 38 — each governed by its own set of rules.

Combination Transaction

A combination transaction is a barter transaction: a sale of part of the land to a developer, and the provision of construction services to the landowner. The landowner is liable for capital gains tax only on the portion sold, and the developer is liable for purchase tax on that portion. The value for both taxes is determined according to the value of the construction services the developer undertook to provide. The developer is liable for VAT on the construction services, even when no money changes hands between the parties.

An owner of a qualifying residential apartment who sells part of his or her rights in it and receives construction services in return in a building to be erected on the land on which the apartment is situated, is entitled to claim an exemption on the portion sold, subject to the conditions of Section 49B (Section 49A(b)).

Pinui Binui (Evacuation-Construction)

• A tenant who sells all of his or her rights in an apartment in a Pinui Binui complex to a developer and receives one replacement apartment in return is exempt from tax if the value of the replacement apartment does not exceed the value ceiling (Section 49KH(a)). Rent for the construction period is considered part of the replacement apartment.

• The ceiling is the higher of the following two amounts: 150% of the value of the apartment sold, less the value of the additional building rights in it, or the value of a 120 sq.m. apartment in the same complex.

• The date of sale is the earliest of the following: the date on which the condition in the agreement was fulfilled, the date on which the option was exercised, and the commencement of construction in the building (Section 49K).

• The developer must notify the Director of every agreement within 30 days (Section 49KA(a)). Before the date of sale, the developer may request confirmation from the Real Estate Taxation Director and the VAT Director that the transaction terms qualify for exemptions (Section 49KA(c)).

TAMA 38

• In a strengthening transaction, the sale of building rights to the developer is exempt from capital gains tax when the consideration is given in the form of construction services under the strengthening plan and the structure was actually strengthened (Section 49LG(a)).

• The construction services covered by the exemption are defined by law: earthquake-proofing the structure, expanding an apartment by up to 25 sq.m. beyond its area, installing an elevator, and designing and renovating the structure (Section 49LB).

• Consideration not given in the form of construction services — for example, a cash payment — is taxed as a sale of another right on a pro-rata basis (Section 49LG(b)).

• TAMA 38 carried out by way of demolition and reconstruction is subject to a separate exemption, for sales from January 1, 2013 through December 31, 2033 (Section 49LG1).

VAT in Urban Renewal

Construction services provided by the developer to tenants in Pinui Binui and TAMA 38 projects are subject to zero-rate VAT, under the conditions and ceilings set out in Section 31A of the VAT Law for Pinui Binui and Section 31B for TAMA 38 (temporary provision through December 31, 2033), as established by Amendment 47 to the Law in 2014. Since this is a taxable transaction, albeit at a zero rate, the developer is entitled to deduct the input tax of the project. Disputes arise regarding the scope of the deduction, as in the Neve Gad case. For further details, including public infrastructure obligations and sales of assets by a dealer, see the page on VAT in Real Estate Transactions and Urban Renewal.

Real Estate Options

An option that meets all the conditions of Section 49Y(a) is taxed separately from the real estate: it was granted in writing, is transferable and exercisable, the seller's undertaking is irrevocable, the exercise period is up to 24 months including extensions, the consideration for it is up to 5% of the value of the right or the exercise price (whichever is higher), the holder was not given possession, and notice was given to the Director within 30 days. The sale of such an option is exempt from capital gains tax and purchase tax, and is subject to capital gains tax on assets or income tax (Section 49Y(b)). Upon exercise, capital gains tax and purchase tax apply, and the consideration paid for the option is added to the value (Section 49Y(c)).

1. You send us the draft agreement, a land registry extract (Tabu), and details of the apartments you own.

2. We determine which track applies — combination, Pinui Binui, or TAMA 38 — and calculate whether the consideration for each tenant falls within the exemption ceiling.

3. When the consideration also includes cash, more than one apartment, or services not on the statutory list, we calculate the tax on the taxable portion and propose changes to the agreement before signing.

4. On the developer's side, we also review the VAT aspects: zero-rate on construction services, input tax deductions, and public infrastructure obligations. Before the date of sale, an advance ruling may be requested under Section 49KA(c).

5. We file all notices and declarations on time. If an assessment is issued that you disagree with, we proceed to an objection and an appeal.

Three VAT appeal judgments in the District Court, involving developer transactions and building rights.

Aura Investments: TC 62970-03-22 (February 13, 2025)

The VAT Director argued that a developer who built public structures and relocated a parking garage and kindergartens had provided a service to the municipality. The District Court held that the works for the municipality constitute a service subject to VAT, but that an occupancy permit and areas received through a pooling and reallocation plan do not constitute consideration. The VAT on the parking garage was reduced from NIS 4,203,927 to NIS 1,799,875, and the charge on the kindergartens was calculated according to the company's computation. The question of whether mere relocation constitutes a service to the municipality was left open. Appeals against the judgment were filed with the Supreme Court (CA 45772-12-25) and are pending. Adv. Shlomi Vaknin and Adv. Ariel Epstein represented Aura. The judgment in the Aura case · The article in Calcalist.

Neve Gad: TC 53560-11-21 (November 9, 2023)

In a Pinui Binui project, the developer paid the legal fees of the tenants' attorney. The Tel Aviv District Court held that the legal services to the tenants are part of the construction services, and therefore the developer is entitled to deduct the input tax. On the two other issues (the timing of the charge and the calculation method), the appeal was dismissed, and the company was ordered to pay costs of NIS 90,000. Adv. Shlomi Vaknin represented Neve Gad. The VAT Director appealed to the Supreme Court, and the appeal is pending. The judgment in the Neve Gad case.

Kargad: TC 15676-01-14 (November 16, 2016)

The company sold building rights attached to a property most of which was leased under protected tenancy pursuant to the Tenant Protection Law. The District Court held that the sale is a transaction subject to VAT, but accepted the appeal for the most part: building rights do not negate the exemption under Section 31(2) of the VAT Law, and the exemption applies in proportion to the area of the five apartments leased under protected tenancy relative to the rest of the property. No exemption was granted for the sixth apartment or the storage unit. Adv. Shlomi Vaknin represented Kargad. The judgment in the Kargad case.

Transactions with developers are led by Adv. Ariel Epstein, a partner at the firm and head of the real estate taxation practice. He studied real estate development in a program run by Ono Academic College and the Ministry of Construction and Housing. The developer's VAT issues are led by Adv. and CPA Shlomi Vaknin, formerly a national supervisor in the professional division of the VAT Authority. Both represented Aura.