Landmark Ruling in Israel – Purchase Tax Rebates to Winners of Mehir LeMishtaken Tenders

Judge Orit Weinstein, presiding over the Appeals Committee for Real Estate Taxation in Haifa, recently accepted the appeals filed by Ashdar Ltd. against the Real Estate Taxation Administration’s decision to reject applications to amend purchase tax assessments.

The Appeals Committee held that, in light of the unique set of agreements and restrictions imposed on Ashdar within the framework of Mehir LeMishtaken tenders, winning the tender and the subsequent engagement do not amount to the grant of a taxable real estate right. Accordingly, the Appeals Committee ordered the cancellation of the assessments and the refund of purchase tax paid in the relevant projects.

Significant Restrictions on Possession and Use Negate Classification as a Real Estate Right

The ruling is based on a substantive analysis of the full set of agreements, including the lease contract, the special conditions appendix, the construction contract, and the instructions of the State-appointed supervisory company. It concludes that the cumulative restrictions imposed on Ashdar deprived it of the characteristics of a lease right holder for purposes of the Real Estate Taxation Law.

Among other things, the ruling emphasizes that the State controlled the identity of the apartment buyers (eligible tender winners), the apartment prices, the specifications, the construction and sale timelines, and the wording and approval of the sale contracts by the State or its representatives. In light of these restrictions, the Appeals Committee held that Ashdar lacked economic control over the real estate or the ability to derive the maximum economic benefit from it, as well as the genuine legal ability to hold the real estate for more than 25 years. Accordingly, the transaction does not constitute the purchase of a “right in real estate” subject to purchase tax. The Appeals Committee further determined that the nature of the transaction between the State and Ashdar was that of an agreement with a performing contractor providing construction services only.

Dramatic Implications

For construction companies – Any company to which the ruling applies—namely a company that participated in Israel Land Authority Mehir LaMishtaken tenders of the type addressed in the ruling—is entitled to a rebate of the purchase tax paid in connection with the relevant transaction. According to the ruling, this involves cancellation of purchase tax assessments by the Israel Tax Authority (ITA), rather than a request to amend an assessment, since the assessment should not have been issued in the first place in the absence of a real estate transaction under the Real Estate Taxation Law.

For apartment buyers – One possible scenario, based on media reports, is that in order to recoup the millions of shekels it must refund to construction companies (or part thereof), the ITA may seek to amend apartment buyers’ purchase tax assessments, subject to the four-year statute of limitations (unless extended). Thus, instead of being taxed on the purchase of a single residential apartment (0%, 3.5%, 5%, 8%), apartment buyers may be taxed on the purchase of land rights (5% or 6%). Such a move would inevitably result in additional purchase tax for each apartment buyer.

The problem with such an approach is that if the ITA intends to appeal the ruling, arguing that Ashdar should be liable for purchase tax on the purchase of real estate rights, this would imply that apartment buyers should continue to be taxed under the residential apartment tax brackets, as originally done. Filing an appeal would therefore conflict with the ITA’s reported intention to amend apartment buyers’ purchase tax assessments and apply land purchase tax rates instead.

What Should You Do?

If you participated in Mehir LaMishtaken tenders and paid purchase tax, we recommend promptly reviewing whether you may be eligible for a purchase tax rebate. We are at your service to perform a preliminary eligibility review based on the tender documents, lease contract, special conditions appendix, and construction contract.

Please note that even if the agreements are titled “98-year lease,” this does not necessarily mean the transaction constitutes the sale of a real estate right. The Appeals Committee explicitly held that, for tax purposes, the test is substantive: who holds economic control, what is the scope of the restrictions, who determines the identity of apartment buyers and the price, and is there a genuine legal ability to hold the real estate for more than 25 years? We therefore recommend examining each project according to the contractual framework and its actual implementation, rather than relying on the formal description of the engagement.

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Adv. Maya Carmi Lubartovski is a partner and head of the firm’s real estate taxation practice.

Barnea Jaffa Lande’s real estate taxation practice provides comprehensive  legal advice on tax planning and the full range of tax issues arising in connection with complex real estate transactions, including urban renewal transactions, combination transactions, consideration-based transactions, sales of residential apartments with building rights, purchasing group transactions, local authority transactions, expropriations, lease agreements, dissolutions of real estate associations, and more.