Nearly a Decade After Buying Princess Hotel in Eilat, Natsba to Pay More Than NIS 17 Million in Tax
The Supreme Court rejected the appeal of Natsba, owned by businessman Kobi Maimon, against a purchase tax assessment of about NIS 17 million in connection with its 2015 acquisition of the Princess Hotel in Eilat. The Princess Hotel, near the Taba terminal in Eilat, was considered for two decades, until 2009, one of Israel’s leading luxury hotels. In late 2015, the hotel ran into financial trouble and collapsed under a debt burden of NIS 197 million, and it has not reopened to this day. ● Landowners in Pi Glilot file suit: part of the land was expropriated for the state ● Unusual ruling: directors bear personal responsibility for trademark infringement
Lexan Israel Ltd., owned by German businessman Alexander Tessler, operated the Princess Hotel from its establishment in 1992 until 2011. In 2011, the company signed an agreement with Isrotel Ltd. under which Isrotel would manage the hotel until December 2021, with an option for two additional five-year periods. Following objections from the Antitrust Commissioner, the agreement was shortened, and it was eventually agreed that Isrotel would manage the hotel until October 2015 only. Later, Lexan ran into financial difficulties and a receiver was appointed for it. In September, Natsba Holdings 1995 Ltd. reached an agreement with Lexan and its shareholders to acquire Lexan shares outside the receivership process. It was agreed that Natsba would purchase 60% of the shares on the date the agreement was signed, some through purchase and some through a share allotment, in the first stage, and it was given an option to acquire the remaining 40% later, in the second stage. The share purchase agreement stated that the hotel’s value, as is, was about NIS 285 million.
An investment of NIS 60 million on October 31, 2015, 41 days after the share purchase agreement was signed, ended Isrotel’s activity at the hotel, and a day later the hotel was closed. After Isrotel stopped operating the hotel, no further reservations were taken from guests, the hotel employees employed by Isrotel were not transferred to work for Lexan, and Lexan did not hire other employees to operate the hotel. From the moment Isrotel left the hotel operation, which had been known and expected in advance, there was no longer a hotel operating at the site. As of November 1, Eilat Municipality granted, at Lexan’s request, a full property tax exemption for the unusable property for a period of three years. In early 2016, renovation work began at the site, during which Lexan filed with the Tourism Ministry an application to approve a tourism investment plan concerning the restoration of the Princess Hotel in Eilat to operation. The investment amount listed in the application was NIS 60 million, and the schedule for the investments was from March 2016 to June 2018.
In a letter sent by a consultant on behalf of Lexan to the Tourism Ministry, it was written that the hotel was in poor maintenance condition and required significant investment in order to bring it to an appropriate state. The hotel was closed to guests for a long period for the purpose of carrying out the work. About two years later, Lexan’s adviser sent another letter stating, among other things, that after Isrotel left the hotel, it was closed to guests. The hotel was then in a poor condition, since no major renovation had been carried out since the hotel opened in 1992. Accordingly, there was no choice but to carry out a massive and thorough renovation of the hotel. In the meantime, in March 2017, Natsba exercised the option granted to it and purchased the remaining 40% of Lexan’s shares. During 2018, Lexan signed an agreement with Swandor under which the latter would operate a hotel at the site. According to the plan, the hotel was supposed to open in 2020, but in December 2019 a major fire broke out there and caused heavy damage, and as of now the hotel has still not opened.
Natsba’s appeal
Natsba did not report the purchase of Lexan shares to the Beer Sheva Real Estate Taxation Officer. According to Natsba, this was because it believed that Lexan was not a “real estate association” as defined by law, and therefore the purchase of its shares was not subject to purchase tax. The Real Estate Taxation Officer disagreed and sent Natsba a reporting demand for the first stage of the share purchase agreement. Later, a reporting demand was sent for the second stage, after which Natsba submitted a report out of caution. Subsequently, tax assessments were determined according to the best judgment method for the second and first stages, respectively. Natsba challenged the assessments, but its objections were rejected. It was determined that the value of the first stage was NIS 171 million, and the value of the second stage was NIS 114 million, 60% and 40% of the hotel’s value stated in the share purchase agreement, respectively. The purchase tax Natsba was required to pay therefore stood at NIS 10.26 million for the first stage and NIS 6.84 million for the second, a total of NIS 17.1 million, principal.
Natsba appealed the decision to the Real Estate Taxation Appeals Committee at the Beersheba District Court, arguing that Lexan should not have been classified as a real estate association, both because the hotel activity and the equipment within it removed the company from the definition and in light of the Tax Authority’s position that hotels are not included within the category of a real estate association. The Appeals Committee rejected the appeal, and Natsba then sought leave to appeal that decision to the Supreme Court.
In its appeal, Natsba argued that according to case law, Tax Authority decisions, and the professional academic literature, an association that owns a hotel should not be considered a real estate association, because of the existence of furniture and equipment, as well as hotel activity, which constitute separate and independent assets from the real estate. On the other hand, the Real Estate Taxation Officer argued that, on the factual level, the Appeals Committee found that at the time of the sale Lexan had no business activity at all, so there was no need to address Natsba’s arguments on appeal. According to him, the only asset Natsba actually purchased was a right in real estate, since after a thorough renovation it would have been possible to conduct hotel activity at the site.
“Artificiality in the argument”
Justice Khaled Kabub, with the agreement of Deputy President Noam Sohlberg and Justice Yitzhak Amit, rejected the appeal. Kabub noted that the purpose of the law provisions requiring purchase tax to also be imposed on a transaction in a real estate association is to prevent tax planning in which, in order to avoid tax liability, a real estate transaction is carried out as a transaction in the shares of a company holding real estate.
“The picture that emerges is that Natsba did not, in fact, buy a company holding a ‘live and kicking’ hotel, but rather a hotel on the verge of closure, when the imminent closure date was known, when the plan was not to continue operating it immediately after closure, but only after renovation, and when there was still no certainty as to the manner of operation after the renovation,” Kabub said, adding, “In this state of affairs, there is some artificiality in the argument that at the time the shares were purchased, Lexan had an asset in the form of business activity, or a genuine ‘going concern’, at the hotel.”
The justice also said that Natsba’s own position in another proceeding, a dispute between Lexan’s former owners and Natsba that concerned payment of the consideration for the share purchase, proves that Natsba did not buy a hotel, but rather a right in real estate. That case involved a lawsuit filed by the hotel owner Tessler in the Tel Aviv District Court, arguing that the agreement he signed with Isrotel and Bank Hapoalim to operate the luxury hotel was not implemented because of their bad faith, which led to the receivership process. The lawsuit was dismissed, but the facts raised there were used against Natsba in the tax proceedings before the Supreme Court.
In the District Court lawsuit, Lexan’s former owners argued that Natsba had במשך years refrained from operating the hotel, thereby thwarting their right to receive part of the consideration, which had been contingent on the hotel’s profits. In its defense in the Tessler matter, Natsba argued, “It is denied that [Natsba] supposedly undertook to operate the hotel through Lexan or at all. [Natsba] will add that it was clear [...] that without renovation work, it would not be possible to operate the hotel and certainly not to receive income equivalent to the minimum income.” Natsba’s position in the Supreme Court proceeding, according to which its intention was to operate the hotel through Lexan after Isrotel left, contradicts these statements. From morning coffee to the weekly refueling, why is everything getting more expensive דווקא עכשיו?
