Which developers are entitled to a refund of land development expenses from the Israel Tax Authority?

In recent years, development expenses in Israel Land Authority (ILA) tenders have become one of the most complex and controversial issues opposite the real estate tax authorities. High payments in respect of development expenses, along with the lack of uniformity in the positions of the tax authorities and direct repercussions on purchase tax and VAT payments, created high uncertainty among developers and tender winners. Recently, a settlement was approved in two class actions, which could lead to significant refunds for some taxpayers, and requires re-examination of the taxation of additional development expenses.

The dispute on the issue of development expenses – purchase tax and VAT

In ILA tenders for the marketing of land, the winners of the tender are often required to pay payments for development expenses, in addition to paying for the land. Development expenses are divided into various types, including “additional development expenses,” which usually include expenses for environmental development work, such as payments for the construction of public institutions, the upgrading of infrastructure in older neighborhoods and payments known as “old versus new.” This is to differentiate from expenses attributed to the purchased lot itself, which are called “regular development expenses.”

Two fundamental disputes arose in relation to the additional development expenses: one relating to purchase tax, and the other relating to VAT.

• Purchase tax – dispute over the value of the transaction

The ITA’s position is that the additional development expenses should be fully added to the value of the land for the purpose of determining the value of the transaction that is liable for purchase tax. On the other hand, the taxpayers’ argument is that only additional development expenses paid for work actually performed should be added to the value of the transaction, just as the ITA customarily does in relation to regular development expenses, and in conformity with the Supreme Court’s ruling in the Emerald case.

• VAT – receipt instead of a tax invoice

Two class actions were filed in 2024 alleging that since the ILA issues only a receipt (and not a tax invoice) for the payment of the additional development expenses, the land purchasers cannot deduct input tax in respect of the payment of these expenses – despite the fact that the ITA considers these expenses to be part of the value of the purchase of the rights in the land and collects purchase tax in respect thereof.

Highlights of the settlement of the class actions:

Who is included in the class entitled to a refund?

The class members to whom the settlement applies are whoever fulfills all of the following conditions:

• winners of ILA tenders that paid additional development expenses as of 28.2.2022, and that will pay such expenses by virtue of tenders to be published by 31.1.2025 or by 30.4.2025, if at issue are joint tenders of the ILA and the Ministry of Construction and Housing;
• class members registered as licensed dealers;
• class members who would have been entitled to deduct input tax had a tax invoice been issued in respect of the following types of additional development expenses: “public institutions,” “old versus new” and “upgrading of infrastructure in older neighborhoods.”

What is the rate of the refund?

The ITA will refund the class members 8.5% of the total additional development expenses paid against a receipt (and not a tax invoice).

• Key conditions for receiving the refund:
  • Submission of all requisite documents: receipts for payment of the additional development expenses, a purchase tax calculation appendix, a purchase tax assessment in respect of the additional development expenses, confirmation of payment of purchase tax in respect thereof or approval to offset the purchase tax debt in respect thereof from the sum of the refund, a withholding tax certificate (“the Refund Documents”).
  • Consent to the inclusion of all additional development expenses in the value of the transaction for the purpose of purchase tax, and payment of the purchase tax in respect thereof (directly or through the refund).
  • The sum of the refund will not be deducted from the value of the transaction for the purpose of purchase tax.
  • Reporting the refund in the report for the tax year in which it was paid and, in the absence of an exemption from withholding tax, withholding tax at the rate of 10%.

How to apply and timetables

Those entitled to a refund must forward the Refund Documents to the class plaintiff’s attorney within 180 days of the settlement approval date. The ITA will transfer the refund due to each class member within 150 days of the date of receipt of the documents.

The bottom line is that class members to whom the settlement applies have to choose between two main alternatives:

1. to continue conducting proceedings with the real estate tax authorities regarding the value of the additional development expenses for the purpose of purchase tax; or
2. join the settlement – agree to the inclusion of all of the additional development expenses in the value of the transaction for the purpose of purchase tax and pay the purchase tax in respect thereof (usually at the rate of 6%) while, at the same time, receiving a refund of 8.5% of the total additional development expenses paid against a receipt.

Naturally, each case should be examined on its own merits but, as a rule of thumb, one can assume that, in most cases, anyone whose key consideration is economic will probably choose the second alternative considering that the refund rate is higher than the purchase tax rate.

Please note: the settlement’s applicability depends upon the tender publication date: it does not apply to winners of tenders published after 31.1.2025 and, in some instances, after 30.4.2025. Anyone who won tenders published after these dates and has a dispute with the ITA about taxation of additional development expenses should exhaust its rights and claims within the framework of objection proceedings with the ITA and also appeal to the courts if its objection is rejected, until the Supreme Court issues its ruling on the matter.

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Adv. Maya Carmi Lubartovski is a partner and heads our firm’s Real Estate Tax Department.

Adv. Itay Edelstein is an associate in our firm’s Tax Department.

Barnea Jaffa Lande’s Real Estate Tax Department provides comprehensive legal advice on tax planning and on all of the various tax issues that arise in relation to real estate transactions, including real estate transactions with complex tax aspects, such as urban renewal transactions, combination transactions, transactions for the sale of residential apartments with building rights, purchase group transactions, transactions of local authorities, expropriations, leasehold agreements, dissolutions of real estate associations, etc.