A resident of the Gaza Strip who won NIS 45 million in a toto, asked the tax authority to exempt him from the 30% tax collected from the winnings. After the authority refused, the district court also determined that this is “income” produced in Israel that “originates from lotteries or prize-bearing activity”, and is taxed in Israel according to law, even when the winner is a foreign resident.
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The winner, a resident of the Gaza Strip who is not a resident of Israel for tax purposes, participated and won a Toto game (WINNER16) that took place in 2015. The winning amount was NIS 45,277,045.
In accordance with the provisions of section 124b of the ordinance and in accordance with the income tax regulations (deduction from payment due to gambling, lotteries or prize-bearing activity), the appellant was originally deducted 30% of the winnings. In addition, after a re-examination by the Autonomy assessor (responsible for the Gaza Strip), the winner was deducted an additional 2% in accordance with the provisions of 121b of the decree for tax on high incomes (Yisaf tax, also known as “rich tax”).
The winner turned to the tax authority with a request to return a total of NIS 13,583,114, which is 30% that was deducted from the winnings for income tax collection. His claim was that he is not liable for income tax for the winnings.
As part of the discussion held, it emerged that in light of the legal situation that prevailed at the time, the additional tax amount that the winner was obligated to pay was not deducted at source, and it was determined that he must pay it as well. After the Tax Authority rejected his request, the winner filed an appeal against this decision to the Jerusalem District Court.
The District Court in Jerusalem rejected the appeal and stated as stated that this is the income of a foreign resident that was generated in Israel and is therefore subject to tax according to law.
Full exemption or classification as capital gain
Section 2a of the Income Tax Ordinance states that “earnings or profits of a person resident in Israel, generated or generated in Israel or outside of Israel, as well as earnings or profits of a person resident abroad, generated or generated in Israel, that originate from gambling, lotteries or prize-bearing activities, shall be taken into account in determining profits or his income, and they will be considered for the purposes of this order as income, except for the purpose of offsetting losses.”
Section 124B of the Ordinance sets the tax rate on income from gambling, lotteries or prizes at 35%, without eligibility for any exemption, discount, deduction, credit or offset. The tax rate has been revised several times since the enactment of the law requiring winnings to be taxed, so that it was initially at a rate of 25%, then the tax rate increased to 30% (at the time of the appellant’s winnings), and now the tax rate on lottery winnings is 35%.
In the appeal he submitted, the winner claimed that due to being a resident of the Palestinian Authority, who has no business or activity in Israel, he is entitled to a full exemption from paying tax in Israel. Alternatively, he claimed that his income from his winnings should be classified as capital gain subject to only 25%. In connection with this, the appellant claims that the source of the charge in section 124B of the Ordinance constitutes an “extremely difficult in terms of its tax consequences”, and that “these provisions are unusual in the Israeli tax landscape and impose a tax other than on the real profit, and therefore should be interpreted as narrowly as possible”.
The winner further claimed that the source of the charge for the lotteries in Israel relates to cases in which they should not be attributed to income “taxable according to another source in the ordinance”, and that in his case the lottery ticket is an “asset”, and the prize is a “capital gain” subject to 25% tax, therefore it should not be taxed in -35% (at the relevant time the tax rate was 30%).
The winner also claimed that the Autonomy assessor worked to tax him with the additional tax in order to “give a blow after a blow and force the appellant to withdraw from his appeal”. According to him, no additional tax should be imposed on the prize money he won.
An incoherent position
Judge Avigdor Dorot rejected all the claims of the winner and stated that “the appellant does not present a coherent position that is backed by appropriate legislation and rulings. The provisions of the law bring the legal arrangement concerning the taxation of winning prizes and lotteries,” and that “there is no room to accept the appellant’s approach seeking to reduce the imposition of the tax.” .
The judge also rejected the winner’s claim that it is a capital gain, and that the lottery ticket is an “asset”. “This is a unique and specific legislative arrangement regarding the taxation of lotteries, and the specific arrangement overrides the provisions regarding the taxation of capital gains,” the judge ruled, ordering the winner to pay court costs of NIS 30,000 for the benefit of the state.