Court ruled: Joey Schwebel will pay tax in the amount of 35.6 million shekels

Joey Schwebel, one of the owners of the global Zara group, will pay tax in the amount of approximately 35.6 million shekels regarding withdrawals totaling approximately 108 million shekels that he made from a company under his control. This follows the Tel Aviv District Court's acceptance of the tax assessor's position, ruling that funds transferred from a company under Schwebel's control to him and to related companies are not loans but withdrawals by a controlling shareholder, which are subject to tax as dividend income.

Joey (Yosef) Schwebel is the controlling shareholder of the "Gottex Brands" group (Gottex Holdings), which serves as the main franchisee in Israel for the international fashion giant Inditex, which includes the brands Zara, Pull&Bear, Massimo Dutti, and others. In addition, Schwebel indirectly holds half of the shares of the Dutch company Findings, which previously owned the company Swimwear, which was sold to Gottex Holdings as part of a series of complex corporate moves in 2013.

In a judgment handed down by the District Court in July of last year (an appeal of which is pending in the Supreme Court), it was determined that the sale was an "artificial transaction" intended for tax reduction, and part of the move was taxed.

After the sale, and over the years, funds were transferred from Gottex Holdings to Findings for the benefit of repaying debts and loans accumulated by Swimwear, and in this context, among other things, a total of approximately 108 million shekels was transferred as loans, allegedly, from the Findings company to Schwebel and companies under his control.

The new judgment was given in six appeals filed by Schwebel and a family company owned by him against their tax liability for the 2015-2017 tax years and discussed various tax issues, including the taxation of those 108 million shekels. In this matter, the dispute revolved around the method of classifying the funds for tax purposes - whether they are tax-exempt loans or a taxable dividend withdrawal.

It was not proven that these are loans that are supposed to be repaid

Through attorneys Doron Levy and Yair Avraham from the Amit, Pollak, Matalon firm, Schwebel and the company owned by him argued that the funds transferred from Findings constitute loans, even though they were not repaid for years. On the other hand, the tax assessor for large enterprises, through attorneys Galit Poah and Sivan Hoida Assayag from the Tel Aviv District Attorney's Office (Civil), argued that withdrawals by a controlling shareholder from a company under his control, which were not returned after a long period of time, constitute taxable income and that Schwebel's claims that they are loans were not proven.

Judge Yardena Seroussi accepted the tax assessor's position in this matter, ruling that Schwebel did not prove that these are loans that are supposed to be repaid, and that no objective and accurate evidence and references were presented that would clarify the path of the funds, the logic of the transfers, and the terms of the loans. It was also determined that the funds are not reflected as loans in the companies' financial statements. Under the circumstances, it was determined that this is in fact a withdrawal of funds by the controlling shareholder, and that Schwebel should be taxed for dividend income on the sum of 108 million shekels.

"It seems that the appellant treated the companies under his control as different wallets serving his interests only. If the appellant does not separate the companies and their interests from his own, there is no reason for the respondent to act otherwise," the judge noted, adding that "the impression arising from the totality of things is that of a controlling shareholder who does with the companies whatever he pleases, in order to serve his personal goals, without considering that the companies are separate legal entities."

Controlling shareholders or substantial shareholders holding 10% or more of the rights in a company pay a dividend tax at a rate of 30%. In addition, a surtax of 3% also applies to high incomes exceeding the ceiling set by law (721,560 shekels per year). Accordingly, the total estimated tax amount that Schwebel and the company owned by him will pay regarding the 108 million shekels stands at approximately 35.6 million shekels (an effective tax rate of approximately 33%).

On other issues discussed in the appeal, some of Schwebel's claims against his tax liability were accepted.