US Company Loses Appeal to Reclaim VAT on Tel Aviv Building Sale

A US-based company that sold an old building in Tel Aviv for NIS 33.34 million attempted to retroactively cancel the NIS 5.67 million in Value Added Tax (VAT) levied on the transaction. The company sought to convince the court that when it purchased the building in 2008, it was not entitled to deduct input tax of approximately NIS 574,000, and even offered to return this sum. Judge Heri Kirsh of the Tel Aviv District Court rejected the appeal, ordering the company to pay NIS 35,000 in expenses.

The building, which contained ten residential apartments and three shops, was predominantly residential, making up about 89% of the space. The company's owners are relatives of the late Sobhi Sankari. In 2008, the company bought the building from another family company for NIS 3.7 million plus VAT, which was fully offset as input tax with the approval of the Tax Authority. The apartments continued to be rented out for residential purposes until 2016.

In 2016, the building was sold for $8.65 million (approximately NIS 33.34 million) plus VAT to two companies belonging to the Keshrei Yam group. The buyers refused to pay the full VAT, leading the seller to cancel the deal. The buyers then filed a motion against the seller. In 2019, the parties reached a settlement where the buyers would pay the VAT if the Tax Authority insisted, and any refunds obtained would belong to them. The sales agreement stipulated that the buyers would deposit a check for NIS 623,566 to the VAT department.

Judge Kirsh questioned why the exemption was important to the seller, as the agreement placed the VAT burden on the buyers. The settlement revealed the buyers' motivation: they planned to continue renting the building for residential purposes and could not deduct the VAT they paid. The company argued that under VAT law, it was not entitled to deduct input tax in 2008 because the building was primarily used for residential rentals, and therefore the 2016 sale should be largely exempt.

The judge noted the unusual situation where the Tax Authority argued for the company's right to deduct input tax, while the company argued against it. The Tax Authority contended that the nearly 70-year-old building, with potential for TAMA 38 urban renewal, was acquired for demolition or resale at a profit. However, the court found no evidence of such intentions in 2008, as the sale occurred eight years later. The judge also considered the Tax Authority's claim of a "pattern of behavior" based on a previous similar transaction by a related company, but found insufficient evidence of a pattern given the eight-year holding period.

Ultimately, the court ruled that the company's offer to return the NIS 574,000 was insufficient. Judge Kirsh stated that businesses cannot "keep all options open" and deduct input tax now, only to cancel it later if it becomes advantageous. He agreed with the Tax Authority that the company was attempting to "have its cake and eat it too" after holding the funds for 11 years. The company's accountant confirmed that the company believed its 2008 tax filings were correct in both 2016 and 2019. The judge also addressed the company's contradictory claims in previous legal proceedings, but did not dismiss the appeal solely on that basis, acknowledging the settlement's provisions and the buyers' initiative in pursuing the case. The financial burden ultimately falls on the buyers, who agreed to pay the VAT and manage the legal proceedings.