Shlomo Nehama defeated the Tax Authority in the Supreme Court this week after a saga that lasted over eight years. In February 2014, Nehama, who previously served as chairman of Bank Hapoalim, sold his apartment in Rothschild Tower 1 in Tel Aviv for NIS 45 million.
Immediately after the sale, the tax authority knocked on his door and demanded praise tax for the sale. At the heart of the dispute between Nehama and the tax authority was a renovation of the prestigious apartment. Until that renovation, the apartment was completely naked (without a toilet, shower, kitchen, etc.), and was considered an empty “shell.”
In the sale of a residential apartment, the seller is exempt from praise tax, while the sale of a non-residential apartment envelope does not qualify for an exemption. The problems of the tax authority were with the timing of the renovation, with the quality of the finish that is not suitable for a luxury apartment and also with the fact that the buyer was not interested in the renovation at all.
Following Nehama’s appeal, through attorneys Ziv Sharon and Ram Caspi, the district court ruled about two years ago that this was a legitimate tax plan, which is within the law. .
Now, in a long and reasoned judgment, the Supreme Court judges ruled by a majority opinion that this is not an artificial renovation and that there is no meaning to the finish and “prestige” of the renovation or the gap between it and the level of “prestige” of the apartment. According to them, even turning an empty property into a residential apartment for tax purposes only does not necessarily indicate artificiality.
“The public is allowed to plan a tax, this is not a bad word”
The ruling is spread over 40 pages, but according to tax experts, this case should not have reached the court in advance. This is a fundamental right. Tax planning is not a bad word. “There is a serious damage to public trust here, because when such a case is taken to the extreme – trust in the tax authority is damaged, and the consequences for this are severe for our economy and society.”
CPA Dorit Gabay, former deputy director of real estate taxation in Haifa and the north and senior assistant to the income tax commissioner, defines the day after the ruling as “a holiday for representatives and tax planners.” According to her, “the goal that should be in front of the eyes of the tax authority is not to pave the interpretive path leading to tax collection at the highest possible rate, but to strive for tax collection according to law provisions and their purpose. Preparation before sale is part of tax planning. “The move is intended to ease and reduce the purchase tax burden.”
Attorney Roi Grilek, head of the real estate taxation department at the firm of Yaron Eldar Feller Schwartz & Co., also clarifies that taking an initiative to “enter” the tax exemption is a legitimate action. “The message that emerges from the ruling is the confirmation of the Supreme Court’s well-known statement that the right to tax planning is part of the taxpayer’s property rights, and he may economize his steps to pay minimum tax. A legitimate tax, since they acted in accordance with the law. “
Grilek adds: “It seems that the Supreme Court criticized the Tax Authority’s position by stating that the main goal is to collect real tax in light of the language of the law and its purpose. It should not try to give a different interpretation that will lead to tax collection at the highest possible rate.”
Adv. Ziv Sharon, represented by Shlomo Nehama / Photo: Eyal Toag
According to attorney and accountant Daniel Paserman, head of taxes at the Gornitzky firm, the ruling does not end the legal dispute over shell apartments. “The judgment discusses at length the artificiality clauses in tax law, but in the end this issue of principle has not been decided and remains in the fog as to how it is interpreted and applied.
“The majority judges ruled that given that this is an apartment located in a residential building, intended for residence, and the only permitted use of it is a residence – then the praise tax exemption is intended to apply to its sale and is not an artificial transaction. This is true whether it is a luxury apartment “It has been ruled that the tax authorities must strive to collect real tax and not pave the way for themselves to try and collect the maximum possible tax.”
The ruling is expected to encourage pre-sale renovations
Is a wave of disputes now expected between the tax authority and sellers of shell apartments that will be renovated just before the sale? Real estate tax experts are unsure. According to Advocate Pesserman, this will not happen because it is not a very common dispute.
Advocate and CPA Shai Einat, an expert in real estate taxation, adds that following legislative changes since the sale of Shlomo Nehama’s apartment, the ruling is relevant in very certain cases: And stipulated that the exemption will only apply to the sale of a single apartment.Whoever has more than one apartment is liable to a tax of 25% on the sale.
“Therefore, the relevance of the decision regarding the sale of the envelope apartments has diminished. The decision is relevant to whoever the apartment he is selling is his only apartment or who bought an apartment in 2014 before the amendment, but it is likely that these apartments have not been empty envelope apartments for a long time. Limited. “
However, Einat estimates that the ruling is expected to encourage many buyers of penthouses to make cosmetic renovations before the sale. “This statement will encourage many to turn to light construction, low quality and cosmetic completions, to turn empty plots and empty apartments into houses, to enjoy a praise tax exemption. Today almost all luxury apartments in Tel Aviv, and in Israel in general, are built and sold at the envelope level. Do not want the contractor to divide and design it for you according to what pattern he has.The same buyers who buy a shell enjoy a low purchase tax, at 6%, instead of 8% or 10%, because the law gives a discount on the purchase of a shell apartment that is not a residential apartment.
“Now all these people will suddenly see that they can enjoy a double tax exemption, both purchase tax and praise tax if they sell the apartment as an apartment after renovation. Bottom line, the ruling currently encourages people to make cosmetic additions to the apartment regardless of the value of the apartment. tax”.
Tax Authority: “Respect and study the ruling”
Aside from the wide-ranging implications of the ruling, it is hard not to wonder how much the procedure cost financially. Shlomo Nehama has hired top-notch lawyers in their field to represent him in litigation, and it must be assumed that their fees have reached very considerable sums. Was it worth it financially? Only he can answer this question, and according to his associates he prefers not to talk about the affair at the moment.
The tax authority responded: “The tax authority respects the court’s ruling and studies the ruling. In general, the tax authority believes in the enforcement of tax law and acts in accordance with the law, with the aim of collecting real tax.”