NPOs Receive Exemptions from Real Estate Betterment Levies

The Israeli Supreme Court handed down a precedent-setting ruling recently in the Evangelical Episcopal Church case. According to the ruling, Israeli NPOs may receive an exemption from paying real estate betterment levies to the relevant local authority, even in instances when the property is not used for the advancement of public purposes.

It should be noted that in accordance with the provisions of the Israeli Planning and Building Law, the term ‘betterment’ refers to the increase in property value resulting from plan approval, easement, or extraordinary use. The betterment levy equates to one-half of this increase and becomes due when property rights are exercised –  for example, during a sale of a property or when applying for a building permit. Section 19(b)(4) of the Third Addendum to the Planning and Building Law enables NPOs to receive an exemption from real estate betterment levies if they fulfill four cumulative conditions:

1. The taxpayer owns the property that underwent betterment.
2. The taxpayer is an institution engaging in one of the following public purposes: education, religion, charity, welfare, health, or sports, or in the case of a public endowment.
3. The NPO is not operating for profit-generating purposes.
4. The property or the proceeds from its sale are being used or are intended to be used for the purposes specified in this section.

The main controversy in the ruling concerned the interpretation of section 19’s fourth condition. The local authority argued that the use of the word “or” in the fourth condition does not exempt NPOs from the requirement to use the property for one of the public purposes specified in the section. According to the local authority, the fourth condition included the word “or” in order to equate between instances in which the property in order to clarify that this exemption applies regardless of whether imposition of the betterment levy occurred as a result of the issuance of a building permit or the sale of the property, and, in any case, only when the property itself is being used for one of the public purposes specified in the section.

“Or” and Not “And/Or”

The Supreme Court overruled the local authority’s argument and ruled that the language of the law is clear and reflects its purpose: NPOs may receive an exemption from real estate betterment levies provided they fulfill one of two conditions: either the property itself is being used or is intended to be used for one of the purposes specified in the law, or the proceeds received from selling the property are being used or are intended to be used for one of the purposes specified in the law.

The court ruled that an NPO’s fulfillment of only the second condition – using the proceeds for one of the public purposes specified in the section – suffices to entitle the NPO to receive the betterment levy exemption, based on the understanding that this condition also has inherent merit, since it benefits institutions operating for public purposes.

This Supreme Court ruling expands the various tax benefits to which NPOs may be entitled, such as an exemption from income tax pursuant to the Income Tax Ordinance, an exemption from capital gains tax pursuant to the Real Estate Taxation Law, and many more.

It is essential for NPOs interested in examining the option of obtaining an exemption from a real estate betterment levy, to consult with legal and financial professionals familiar with the matter, in order for a preliminary planning of a sale transaction or the exercise of building rights.

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Adv. Sagi Gross is a partner at Barnea Jaffa Lande and heads the firm’s NPO practice.

Adv. Alon Wolner is a partner at Barnea Jaffa Lande’s Commercial Real Estate Department.