Israeli Supreme Court Rules No Betterment Tax on TAMA 38 Property Without Building Permit
The Israeli Supreme Court has definitively ruled that properties benefiting from increased value due to TAMA 38 zoning but lacking an issued building permit under the plan are not subject to betterment tax. Justice Yael Wilner rejected requests from the Tel Aviv and Jerusalem municipalities for a rehearing, effectively upholding a precedent-setting ruling from last year. The case, decided by a three-justice panel including Alex Stein, Noam Solberg, and Yosef Elron, addressed how betterment tax should be calculated on properties whose value rose due to the potential for TAMA 38 projects or related urban renewal plans such as the Tel Aviv quarters and Jerusalem’s Marhavya plan.
The municipalities argued that approval of these plans created a future betterment potential that increased property values even without actual construction. However, the court ruled that approval of TAMA 38 alone does not constitute a taxable event justifying betterment tax, as these are general plans without guaranteed applicability to every property, unlike regular plans which have higher certainty and justify taxation. The court emphasized that betterment tax liability requires a causal link between the taxpayer’s gain and the improvement plan, stating, "If the local committee did not give, it cannot take."
This ruling invalidates hundreds of betterment tax assessments issued by Tel Aviv and Jerusalem municipalities on properties eligible for TAMA 38 or derivative plans, potentially costing the municipalities billions of shekels. The municipalities’ appeals cited significant economic impacts and inconsistent prior rulings but were dismissed by Justice Wilner, who noted that economic consequences alone do not justify further hearings.
Legal and real estate professionals welcomed the decision as clarifying and fair, though some anticipate prolonged legal disputes as municipalities may seek alternative legal arguments to collect these taxes. Experts highlighted that the ruling aligns betterment tax calculations with actual market realities rather than theoretical potential values, simplifying valuation processes and providing certainty to property owners.
The Supreme Court also ordered the municipalities to pay legal costs of 15,000 shekels each. This judgment marks a significant legal clarification on the taxation of urban renewal-related property value increases in Israel.
