There is no consolation for the Tax Authority: what can be learned from the victory of the former Hapoalim chairman

by time news

1. The tax authority adopts a strict interpretation in order to collect as much as possible

The media recently extensively covered the victory of Shlomo Nechama, the former chairman of Bank Hapoalim, and his partner, a sort of shot at the tax authority. The dispute revolved around the sale of an apartment in a building on Rothschild Street in Tel Aviv – did Nechama seek to “evade” payment of sales tax by selling a “shell apartment” “As a “residential apartment” is exempt from tax? I don’t know if the prices of the apartments in the Emirates mean anything to comfort or to the buyer Mark Sheinberg, but still it is worth paying attention to the numbers. The apartment was sold for NIS 45 million, and the battle was over a NIS 4 million appreciation tax. Obviously , the fees of Nechama’s lawyers, Ziv Sharon and Ram Caspi, are also close to the price of a small apartment. The authority began the story as a criminal investigation alleging tax evasion, it continued as a civil dispute and ended in the Supreme Court. Judges Yitzhak Amit and David Mintz ruled in favor of Nechama, while Neil Handel was for the benefit of the tax authority.

Beyond the specific conflict to which we will return later, Judge Amit Lasvetz found in his ruling a “rebuke” to the Tax Authority. “Recently I will have the opportunity,” he wrote (implying that this is not the first time), “to comment that the goal that should be in front of the eyes of the tax authorities is not to pave the interpretive path leading to the collection of tax at the highest possible rate, but to strive for the collection of a true tax according to their tongue of the provisions of the law and their purpose”. And in simple Hebrew with my interpretation: the purpose of the authority is not to maximize the collection based on the perception that everyone is cheating, but to strive for the collection of real tax.

The problem is that everyone sees their own truth. Especially when it comes to money and then the Authority and the taxpayer see completely different numbers. A similar tension exists throughout the space between the state authorities and its citizens. When the former President of the Supreme Court Aharon Barak lectured the members of the criminal prosecution, he asked them not to be overly disappointed by acquittals. and why? Because convictions, he explained, are not the main goal, but bringing justice and the truth to light. The things are true not only in relation to the criminal truth but also the taxation, and this corresponds with the position of the fellow judge in our case. Just as one should not look for convictions at any cost, one should not look for the interpretation that leads to maximum collection.

2. The judges determined that the renovation was not a misrepresentation intended to gain an exemption

Why did Nechama arouse the suspicion of the tax authority on him? The building where the apartment was sold already received form 4 and was approved as a residential building. Still, Nechama left the apartment as an uninhabited “shell apartment”: without interior doors, flooring, sanitary ware, faucets, and more. But in order to gain an exemption from appreciation tax at the time of the sale to Scheinberg, he hastened to renovate it to make it an exempt residential apartment. The tax authority claimed that the renovation was intended solely for the purposes of the exemption, therefore it is an “artificial” transaction.

The majority judges, Yitzhak Amit and David Mintz, stuck to the moment of the sale itself. “I do not believe that the renovation operation should be ‘isolated’ and looked at in isolation, and then ‘projected’ from it onto the sales transaction in a way that excludes from the apartment the fact that it was a ‘residential apartment’ at the time of its sale,” wrote Judge Amit and added: “In other words, the choice of the respondents ( The Nechama couple) to renovate the apartment near the time of its sale in order to bring it within the scope of the exemption, there is no point in painting the transaction with artificial colors.” In contrast, minority judge Handel stated that “the renovation of the apartment is intended to present a presentation of a residential apartment for a minimal period; this is artificial in itself.” Handel also analyzed the social purpose of the exemption – to encourage residence and not to leave “shell” apartments intended for investment and leisure. The Nechama couple, Hendel stated, did not live in the apartment and “asked to sell their apartment at the time it was sold only to enjoy a tax benefit that they would not have been able to enjoy if they had sold it at a later date.”

3. What is the duty of a company that purchases its shares or buys a losing company for tax purposes?

After the Supreme Court ruled against the interpretation of the tax authority in the case of Nachama, another dispute is pending regarding the question of the artificial transactions that occupy the market: self-purchase of shares. When shareholders in a company want to “get rid” of a shareholder who also wants to leave, they are faced with two ways: one, to distribute a dividend to all shareholders so that they have money to buy the share of the one who is leaving. except that this operation is subject to tax on the dividend; The second way is designed to avoid the tax, and the dispute is abandoned about it – the company performs an “own purchase” of the shares. The tax authority claims that this is an artificial transaction. Her position was accepted, except in one case. The district in Haifa accepted the position of the taxpayer and the story will be decided by the Supreme Court.

Another case that is considered the “classic” artificial transaction is when the taxpayer purchases a losing company. The Tax Authority claims that the purpose of the purchase is solely to utilize the accumulated losses in the acquired company for the purpose of tax exemption. The counter claim, if we go back for a moment to the accepted claims against the prosecutor’s office, is that the state authorities do not have a deep understanding of what is going on in the commercial world, the private market and the variety of legitimate economic interests that swarm there. For example, sometimes there is real commercial sense in the purchase of a losing company, and not everything should be examined through the hole of the dime, even though in this case there is only a hole but no dime.

And following the comparison with the attorney’s office, the tax authority, like the criminal attorney’s office, records over 90% success in the courts, and both have the same explanation: we only come to court with strong and well-founded cases. Because of the load, because of the pre-screening with us, because of the priority to close an interest in talks and negotiations.

4. A broad view may decide whether the action is artificial

Attorney Noa Lev Goldstein, head of the tax department (jointly) at the Fisher firm: “The verdict in the Nechama matter has far-reaching implications beyond the current case, which should also affect other disputes between taxpayers and the tax authority. In a place where as part of a whole network of actions (business or private) performed by a taxpayer, one action, or several individual actions, is performed, the sole purpose of which is to enter the applicability of the law that grants tax exemption – then they will not make the transaction as a whole ‘artificial’. In the vast majority of cases, the tax authority is the one who claimed a ‘broad view’ of all operations related to the transaction, to support the claim that it is an ‘artificial transaction’. For example, in a case that dealt with the purchase of a company with accumulated losses, the authority’s argument was that one should not look only at the purchase itself, but at the attempt to ‘cash in’ against profits from other activities. It is clear from the judgment regarding Nechama that such a broad point of view can work in both directions, and just as it can testify that the transaction is ‘artificial’, so it can negate such a claim by the tax authority.”

5. A senior official at the Tax Authority explains why the success rates in the trial are high

And what about Judge Amit’s comment about the tendency for a stricter interpretation for maximum collection? “Judge Amit only sees the cases in which there is a dispute,” a senior official at the Tax Authority clarifies. “Like the case of Nechama, in which the taxpayer admits that he did the renovation before the sale. Or in questions of legal interpretation, like in the story of the self-purchase of shares that is not defined by law, then the court is decisive, and it is legitimate for him to mark the boundaries of the section for us. In most cases we do not reach the house The trial, so our success rate there is high.”

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