Tax Authority Appeals Order to Refund Contractors Hundreds of Millions of Shekels

The Israel Tax Authority has filed an appeal to the Supreme Court against an order requiring it to return hundreds of millions of shekels to hundreds of construction companies, on account of purchase tax they overpaid in Mechir Lamishtaken tenders. In the appeal, the Tax Authority is seeking to overturn the precedent-setting ruling of the Land Tax Appeals Committee at the Haifa District Court, which accepted the position of the construction company Ashdar that developers who won Mechir Lamishtaken tenders did not purchase a "right in real estate," but in practice provided construction services to the state, as an executing contractor or project manager, and therefore are not liable for purchase tax on the acquisition of the land.

In the appeal, the authority challenges the committee's finding that the lease agreements signed between the construction companies and the Israel Land Authority as part of the Mechir Lamishtaken tenders did not grant the companies an actual leasehold right. According to the authority, the conclusion that these were not leases but rather transactions with an executing contractor "clashes with reality." "In the 'real' world, lease agreements were signed for 98 plus another 98 years, leases that were also registered in the land registry when it was possible to register them, lease agreements with business companies for profit, not philanthropy..., under which rights were granted, in return for substantial sums paid by the contractor companies for the land, to hold and use the land in a way that enabled the construction of buildings, and even neighborhoods, and to sell the apartments at handsome profits," the appeal states, adding with clear sarcasm: "And if lease agreements are not lease agreements, then what are they? According to the ruling, they are engagements with an executing contractor, a project manager. And it is puzzling, is it really conceivable that the state, acting through the authority responsible for managing its lands (the Israel Land Authority), does not know the difference between entering into lease agreements and entering into agreements with executing contractors or project managers?"

The ruling that the authority is appealing was handed down in an appeal filed by Ashdar, through attorneys Lior Neumann, Guy Wertheim and Tal Shevo of S. Horowitz & Co., and attorney and CPA Tal Plumbaum and attorney Zvi Hamish, against the decision of the Land Taxation Manager not to refund it the purchase tax it paid in Mechir Lamishtaken tenders. The company, which won three Mechir Lamishtaken tenders in Tirat Carmel, Kiryat Eliezer and Kiryat Ono, paid purchase tax according to self-assessments it submitted, and even declared in its financial statements that it had purchased a right in real estate. Later, after receiving legal advice, it filed a request to amend the assessments, arguing there had been a legal mistake, and demanded a refund of the purchase tax it had paid.

In its request to amend the assessment, Ashdar asked the Land Taxation Manager to determine that its agreement with the Israel Land Authority after winning the Mechir Lamishtaken tender did not constitute the purchase of a "right in real estate" under the Land Taxation Law (Appreciation and Purchase), and therefore it was not liable to pay purchase tax. The Land Taxation Manager rejected the request to amend the assessment and ruled that the claim that this was not the purchase of a "right in real estate" contradicted Ashdar's own understanding of the nature of the transaction, breached the tender terms, and in any event did not accord with the wording of the tender and the agreements signed by the company. In his view, Mechir Lamishtaken tenders are unequivocally real estate transactions, and therefore purchase tax must be paid on them.

The ruling that resolved this dispute in Ashdar's favor had ramifications for hundreds of contractors across the country, after a series of procedural agreements established that the ruling would be adopted in all disputes between contractors and the Tax Authority on the same issue. Dozens of appeals were filed with the Land Tax Appeals Committee at the Haifa District Court by many other development and real estate companies that won Mechir Lamishtaken tenders and also submitted requests to amend assessments similar, if not identical, to the request filed by Ashdar, on the same grounds and with identical arguments, and their requests were rejected by the Land Taxation Manager. At the same time, more than 150 appeals were filed with Land Tax Appeals Committees across the country on the same issue discussed in Ashdar's case.

The central question at the heart of the dispute was whether the developer acquired a right in land or provided construction services. The parties disagreed over the nature of the transaction in Mechir Lamishtaken tenders, whether the lease rights received by Ashdar for a period of 98 years, with an option for 98 more, amount to a "right in real estate" subject to purchase tax. While the state argued that these were lease rights, the Appeals Committee accepted Ashdar's position that, after examining the full set of terms in the agreements signed between it and the state following its victory in the Mechir Lamishtaken tenders, in light of the unique characteristics of these tenders and the purpose of the Mechir Lamishtaken program, the clear conclusion was that it had not purchased a "right in real estate."

Judge Orit Weinstein, with the agreement of Appeals Committee chair attorney Rafael Marciano and committee member attorney Ilan Tamam, ruled that "the true legal essence of the engagement between the state and Ashdar, following its victory in the Mechir Lamishtaken tenders, as reflected in the contractual framework it was made to sign, is an engagement with an executing contractor, acting in the name and on behalf of the state to implement its policy within the flagship Mechir Lamishtaken project and carry it out. This was done by building Mechir Lamishtaken apartments and carrying out all the necessary legal actions, as the long arm of the state, to transfer them to the buyers who were selected in the Ministry of Construction and Housing lotteries and who, under the eligibility conditions set by the state, are entitled to purchase an apartment at a reduced price because they are without housing or are housing improvers."

The Tax Authority said the ruling has significant broad implications. On this basis, the Tax Authority has appealed. Through the Fiscal Department of the State Attorney's Office, the Tax Authority argues that the ruling is wrong, because in its view the transactions between the developers and the Israel Land Authority meet all the definitions of a "lease agreement," including the developers' use of the land, the consideration paid for it and the lease term; that the developers' sale agreements with apartment buyers include the transfer of the remaining lease rights to the apartment buyers, not all the lease rights; and that the ruling concluded these were not lease agreements after adding tests for the existence of a lease that are irrelevant and immaterial.

The Tax Authority argues in the appeal that the ruling has significant broad implications, both for other aspects of how developers conduct themselves vis-à-vis the tax authorities and for the status of the sales agreements between developers and apartment buyers, and perhaps even for the purchase tax liability of apartment buyers. Therefore, it says, the Supreme Court should intervene in the Appeals Committee's determinations. Until the Supreme Court rules on the matter, the Tax Authority is allowing, in appropriate cases, a procedural arrangement linking them to a final Supreme Court decision.

Attorney Lior Neumann, who represents Ashdar and the other developers, said in response: "The Tax Authority's appeal does not address the argument that this is a lease that does not amount to a 'right in real estate' as defined in the Land Taxation Law. Under the Land Taxation Law and case law, a lease right constitutes a right in real estate only if the lessee has an effective legal right to compel the lessor to hold the real estate for more than 25 years and if the lessee has most of the economic ties. Here, the Appeals Committee was right in its finding that this is definitely not the case, and the Israel Land Authority's senior official admitted as much under cross-examination."

"For example, a 24-year lease in which the lessee has during those years all the economic rights to do whatever he wants, including the right to be registered in the land registry, does not constitute a real estate transaction, and certainly not a short-term right of a few months to a few years to build and an obligation to transfer the built apartment to eligible buyers selected by the state and who sign a lease agreement with the state. The attempt to intimidate with fabricated claims of a 'shock' to the market and an impact on apartment buyers, as if they bought land and built the apartments themselves, is also incorrect and will not succeed. In the end, the state simply needs to refund purchase tax, nothing more."

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