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 for the real estate tax authorities. High payments for development expenses, combined with the lack of uniformity in the tax authorities’ positions and the direct impact on purchase tax and VAT payments, have created uncertainty for developers and tender winners. A settlement in two relevant class actions was recently approved, potentially leading to significant refunds for some taxpayers and requiring a re-examination of the taxation of additional development expenses.

Development Expenses Dispute: Purchase Tax and VAT

In ILA tenders for the marketing of land, winners are often required to pay for development expenses in addition to the land price. Development expenses are divided into various types, including “additional development expenses,” which typically cover expenses for environmental development work, such as payments for the construction of public institutions, upgrading infrastructure in older neighborhoods, and amounts known as “old versus new.” These are distinguished from expenses attributed to the purchased lot itself, which are referred to as “regular development expenses.”

Two fundamental disputes have arisen regarding additional development expenses: one concerning purchase tax and the other concerning VAT.

• Purchase tax – dispute over the value of the transaction

The Israel Tax Authority (ITA) maintains that additional development expenses should be fully added to the land’s value when determining the transaction value subject to purchase tax. Taxpayers, however, argue that only additional development expenses for work actually performed should be added, consistent with the ITA’s treatment of regular development expenses and the Supreme Court’s ruling in the Emerald case.

• VAT – receipt instead of a tax invoice

Two class actions filed in 2024 alleged that, since the ILA issues only a receipt (not a tax invoice) for additional development expenses, land purchasers cannot deduct input tax for these payments, even though the ITA considers these expenses to be part of the land purchase price and collects purchase tax on them.

Highlights of the Settlement

Who in the class is entitled to a refund?

Class members eligible for the settlement include those who fulfill all of the following conditions:

• Winners of ILA tenders who paid additional development expenses as of February 28, 2022, and who will pay such expenses under tenders published by January 31, 2025, or April 30, 2025, for joint ILA and the Ministry of Construction and Housing tenders.
• Class members registered as licensed dealer.
• Class members who would have been entitled to deduct input tax if a tax invoice had been issued for additional development expenses categorized as “public institutions,” “old versus new,” or “upgrading infrastructure in older neighborhoods.”

What is the refund rate?

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

• Key conditions for receiving the refund:
  • Submission of all required documents: receipts for payment of additional development expenses, purchase tax calculation appendix, purchase tax assessment for the additional development expenses, confirmation of purchase tax payment or approval to offset the purchase tax debt against the refund, and a withholding tax certificate.
  • Consent to the inclusion of all additional development expenses in the transaction value for purchase tax purposes, with purchase tax paid accordingly (directly or through the refund).
  • The refund will not be deducted from the transaction value for purchase tax purposes.
  • Reporting the refund in the tax year in which it was received and, if no withholding tax exemption applies, withholding tax at 10%.

How to Apply and Timetables

Eligible class members must submit the refund documents to the class plaintiff’s attorney within 180 days of settlement approval . The ITA will transfer the refund within 150 days of receiving the documents.

Bottom line: class members have two main options:

1. Continue proceedings with the real estate tax authorities regarding the value of the additional development expenses for purchase tax purposes.
2. Join the settlement – means agreeing to include all additional development expenses in the transaction value for purchase tax purposes, paying the purchase tax (usually at 6%), and receiving a refund of 8.5% of the total additional development expenses paid, against a receipt.

Each case should be evaluated individually, but, generally, taxpayers prioritizing economic consideration is economic are likely to choose the second option, sincethe refund rate is higher than the purchase tax rate.

Please note: The settlement applies only to tender published on or before January 31, 2025, and, in some cases,  April 30, 2025. Winners of later tenders must pursue their claims through objection proceedings with the ITA and, if necessary, appeal to the courts until a Supreme Court ruling is issued.

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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 the wide range of tax issues that can arise in real estate transactions,. This included  complex transactions such as urban renewal projects, combination transactions, sales of residential apartments with building rights, purchase group transactions, transactions involving local authorities, expropriations, leasehold agreements, and dissolutions of real estate associations.