Court Denies VAT Exemption on Tel Aviv Building Sale, Upholding 5.6M NIS Debt
The Tel Aviv District Court dismissed an appeal by a company seeking a VAT exemption on a building sale, upholding a 5.67 million shekel tax liability because input tax was previously deducted.
The Tel Aviv District Court recently dismissed an appeal filed by a company seeking a VAT exemption on the majority of proceeds from the sale of a building in the city, upholding a tax liability of approximately 5.67 million shekels. Judge Harry Kirsh ruled that the company, which had deducted input tax of about 574,000 shekels when acquiring the property, cannot benefit from the exemption upon its sale.
The case involves an American corporation that purchased an old building on Barzilai Street in southern Tel Aviv in 2008 for 3.7 million shekels plus VAT. The building contained ten residential apartments and three commercial stores, serving as the company's sole asset. The acquisition was executed from a company affiliated with the rights holders' family against bank debts and aimed at keeping the building within family ownership. At the time of purchase, the company fully deducted the VAT on the transaction, amounting to roughly 574,000 shekels, as input tax.
The Sale and the Dispute
The apartments continued to be rented out for residential purposes for eight years. In 2016, the building was sold to two companies for approximately 33.34 million shekels plus VAT. The dispute erupted when the purchasing companies refused to cover the full VAT amount. The seller sought to cancel the agreement, prompting the buyers to turn to the court. Under a 2019 compromise agreement, the parties agreed to approach the VAT director to request an exemption. The current legal proceeding was conducted in the seller's name but at the initiative and for the benefit of the buyers.
"Businesses cannot leave all options open, deducting tax in the present and canceling the deduction in the future if it proves profitable, without any time limit."
In its appeal, the company argued that roughly 89% of the building's space was used for residential rentals, which are exempt from VAT, and therefore it was not originally entitled to deduct the tax on the acquisition of this portion. The VAT director countered that the deduction at the time of purchase was permissible because the building was intended for future commercial realization. Alternatively, he argued that the actual deduction of the tax nullifies the requested exemption.
Court Ruling and Implications
Judge Kirsh adopted the VAT director's position, ruling that claiming the input tax deduction during purchase explicitly precludes claiming an exemption during the sale. He explained that the exemption is designed for entities that were neither entitled to deduct the tax nor actually deducted it. Once the tax is deducted, even if contrary to the law, the justification for the exemption evaporates.
Furthermore, the court rejected the company's proposal to return the deducted tax to the state in exchange for the exemption. The judge noted that the deadline for corrections had passed and that the company raised the issue only due to the buyers' refusal to pay. Consequently, the appeal was dismissed, and the company was ordered to pay the VAT director legal expenses totaling 35,000 shekels.
