Globes, Ella Levi-Weinrib  22.11.2020

In 2007, a contractor company purchased an old building, and sold the apartments to a controlling shareholder and a stakeholder in it. The parties have entered into several agreements, according to which after the purchase of the apartments, the building will be demolished and the company will provide construction services to the controlling shareholder and the stakeholder, so that eventually they will receive upgraded apartments in the new building.

The tax authority did not like the split of transactions - the purchase of apartments and then construction services - which led to a reduced VAT payment, hundreds of thousands of shekels instead of several millions.
This controversy reached the Supreme Court, which recently ruled - some 13 years after the deal in question - that it was an improper attempt to obtain tax relief by disguising the true nature of the deal.

Background: Purchase of an old building destined for demolition

In January 2007, Givot David Investments and Real Estate purchased from private sellers an old building at 82 Hayarkon Street in Tel Aviv. According to the permit, the old building could be demolished and a new building built under it.

A year later, the company entered into agreements for the sale of six apartments in the old building: three apartments were sold to Sami Marciano, founder and controlling owner of Givot David Investments, and three apartments were sold to Haim Alkobi, a stakeholder in the company. The apartments were purchased by the company for a total of 7.3 million NIS, and were sold to Marciano and Alkobi for a total of NIS 8.1 million.

Near and after the conclusion of the sale agreements, three additional agreements were signed between the company, Alkobi and Marciano - a distribution and sharing agreement, under which Alkobi and Marciano authorized the company to do whatever was necessary for the optimal realization of the land on which the old building stood; A cooperation agreement, in which it was agreed that the old building would be demolished and a new one built under it, and that Alkobi and Marciano would receive apartments in it whose main area would be the same as the area of ​​the apartments they purchased in the old building.

In addition, it was agreed that the company would enter into agreements with suppliers and service providers for the construction of the new building, and would charge Alkobi and Marciano their proportionate share in the costs of construction services; As well as a sharing and division agreement under which Alkobi and Marciano will receive two apartments in the new building, on higher floors compared to apartments purchased in the old building.

In April 2008, the old building was demolished, and about a year later, the company contracted with service providers to carry out the work to build the new building. A few years later, after Form 4 was given to the new building, the new apartments were made available to Alkobi and Marciano.

The controversy: splitting the deal for taxation purposes

Near the date of the sale agreements, Alkobi and Marciano reported to the Tel Aviv Real Estate Tax Administration about the purchase of the apartments and declared the purchase tax for them. The Director of Taxation rejected this report for the main reason that it does not reflect the market value of the new apartments actually sold. After negotiations between the parties to the same procedure, in March 2013 they signed a compromise agreement, according to which the value of the new apartments will be NIS 4.375 million for each apartment.

During 2008, Givot David reported to the VAT director on the sales agreements. The company reported the transaction price according to the difference between the price it purchased the apartments in the old building for Alkobi and Marciano (NIS 7.3 million) and the price at which it sold them to Alkobi and Marciano (NIS 8.1 million). Section 5 (b) of the Value Added Tax Law, which stipulates that "in the sale of a residential apartment by a real estate dealer who purchased it from a non-profit, financial institution or dealer, the tax on it will not be from the full price but from the difference between the price at the time of sale and the price at purchase. ".

This means that the company reported the amount of taxable transactions that amounted to only NIS 691,819 (and accordingly paid tax in the amount of NIS 107,232).

In addition, the company reported the provision of construction services to Alkobi and Marciano for NIS 4.4 million (for which it paid tax in the amount of NIS 803,000).

Since 2010, the Tel Aviv VAT Director has conducted audit and investigation procedures for the report, but only in July 2014 did he issue a transaction tax assessment, in which he owed it for the sale of the four new apartments to Alkobi and Marciano according to the market value of a new apartment (NIS 4,375 million. Alkobi and Marciano), less the amounts reported by the company and paid tax on their behalf.

At the heart of the assessment was the position of the VAT director, according to which splitting the transaction between the company and Alkobi and Marciano into several separate agreements does not correspond to the true economic essence of the transaction - the sale of apartments in the new building.

According to the Tax Authority, the split has no commercial purpose other than an improper attempt to reduce the tax rate, and therefore the transaction tax fund was reduced to NIS 1.66 million.

District Appeal: We sold old apartments

After its objections to the assessment were rejected, the company filed an appeal with the district court over the tax assessments. The company protested the reclassification of the transaction as the sale of apartments in the new building while charging VAT for full value, and argued that according to its reports the sale agreements should be seen as the sale of apartments in the old building while applying section 5 (b) of the VAT Act.

Second, and alternatively, the company claimed that the tax assessment became statute-barred because more than five years had elapsed from the date of submission of the report to the date of issue of the assessment; And third, it was argued that it should be stipulated that all payments made to the company for the purchase of the apartments in the period of more than five years prior to the issuance of the transaction tax assessment, became obsolete, and therefore these payments should be deducted from the receipts.

The decision: The essence is new apartments

Judge Yardena Seroussi of the Tel Aviv District Court rejected the Givot David tax appeal, ruling that the real essence of the deal between the company and Alkobi and Marciano is not the sale of six apartments in the old building alongside the provision of new apartment construction services, but the sale of four Dwellings in the new building, as claimed by the VAT director.
The court agreed to discuss the statute of limitations claim of the assessee even though this claim was not raised at all in the acquisition stage before the tax authority, but ultimately rejected the first statute of limitations claim.

On the other hand, the district accepted the claim that only the payments made to the company for the purchase of the apartments before June 2009, in the period of more than 5 years prior to the issuance of the transaction tax assessment, will become statute-barred and the tax will be deducted from the assessment amount.

Top: In advance we intended to demolish the apartments

On the decision regarding the assessment, the company filed an appeal to the Supreme Court, in which it reiterated its claim that it should not be charged VAT according to the value of the new apartments but on the sale of six apartments in an old building and construction services.

The Supreme Court dismissed the company's appeal, initially stating that there was no justification for allowing the company to raise the statute of limitations claim for the first time in the tax appeal after it was not raised in the acquisition hearings.

On the merits, the court ruled that the district court's findings should not be interfered with because it was a sale of six new and old apartments, as it was properly based on the facts, and especially on the fact that at the time of the sale agreements it was clear to the parties that Givot David intended to demolish the old building. And to build a new building under it, and even had in her hands the necessary permission to do so.

In addition, already in the first agreement, which was signed together with the sale agreements, the company undertook to Alkobi and Marciano to provide them with new apartments. Hence it was rightly held that the true essence of the transaction is not the purchase of the apartments in the old building, but a transaction for the sale of new apartments as planned by the parties from the beginning.

Meaning: "The deal will not be worthwhile"

According to Adv. Meir Mizrahi, an expert in real estate taxation, the ruling has a broad effect on transactions in urban renewal, as it prevents the tenant from selling his apartment to an entrepreneur or other dealer in the period between the demolition of the apartment and the construction of his alternative apartment. , In such a way that the sale will not be worthwhile "and will delay the transaction for the realization of the new apartment until the completion of construction or until a private buyer is found."

Adv. Meir Mizrahi / Photo: Eyal Yitzhar, Globes

Mizrahi further states that "the rulings regarding the statute of limitations in the judgment re-emphasize the importance of the acquisition procedure - although it is an internal procedure within the tax authorities, the arguments raised in it are still important, since the rule is that in the appeal phase "For an exceptional approval. And there is no certainty that the court will allow them."

Advocate and CPA Shai Einat, an expert in real estate taxation, believes that the ruling is an example of a situation in which all possible mistakes were made due to non-planning of tax in advance. "Reading the ruling only shows how important tax planning is in advance Real estate. 'Planning' is not a derogatory word and in many cases comes to prevent unnecessary tax accidents as happened to the Givot David company and its controlling shareholders. "

According to Adv. Einat, "Mr. Alkobi and Mr. Marciano could have avoided the entire discussion with the VAT manager, and saved unnecessary VAT and purchase tax, if they had made proper tax planning when purchasing the land originally from the occupants of the old building in January 2007. The correct tax planning was "From the outset, in the base transaction in 2007, parts of the building were privately owned by Marciano and Alkobi, and the bulk of the building was owned by the company they purchased. Later, Marciano and Alkobi would seek to receive construction services from the company they owned, or from a third party."

"This tax planning," says Adv. Einat, "is very common among developers who want to enjoy the increase in the value of the new apartments being built in the project on a private level and not as part of a company. If they had done so, they would have saved the unnecessary VAT that the company paid when selling the old-new apartments to the controlling shareholders and the purchase tax paid by Alkobi and Marciano in purchasing the apartments from the company. "For example, the sale of a single apartment is exempt from praise tax."

Adv. Shai Einat / Photo: Private photo

According to Adv. Ami Ben-Ya'akov, who heads the Ben-Ya'akov firm, "there is no doubt that this is a classic case of 'you did not catch a lot'. It is appropriate and proper to respect the true economic essence of the transaction as an end-to-end act in thought first, but it is appropriate that the tax authorities not only use this approach when it is convenient for them to levy additional tax but also when the economic essence tends towards the taxpayer. "Tax planning is of course legitimate, and it is important to ensure that the planning boundaries do not slip into a tax evasion that will lead to court intervention and rulings that could harm tax planning that every citizen and taxpayer is entitled to."

Sequence of Events

■ Company hills David bought an old building in Tel Aviv
■ controlling shareholder and an interested buyers six apartments
■ sides signed an agreement with the company under which the building will be demolished and will be rebuilt under him
■ homeowners reported to the Tax Authority on a deal for the purchase of old apartments and purchase of construction services
■ Tax Authority forced them VAT on the purchase of new apartments - much higher tax
■ The Supreme Court ruled in favor of the Tax Authority