Israeli court applies VAT to sale of building in Tel Aviv
A district court in Israel ruled that full value-added tax must be applied to the sale of a building in Tel Aviv that belonged to the American company Twenty Four Seven International Holdings LLC. The company was not allowed to return the previously refunded VAT on the purchase of the property in order to avoid a significantly larger tax at the time of sale, The Jerusalem Post reports.
Sale after eight years
For Israeli tax purposes, the company was recognized as an entity whose entire assets consisted of rights to Israeli real estate. In 2008, it purchased a share in an old building in Tel Aviv for 3.7 million shekels excluding VAT. The tax at the then rate of 15.5% amounted to approximately 574,000 shekels.
Residential apartments occupied 89% of the building's area, while shops accounted for another 11%. The tax authority allowed the company to recover input VAT because it stated that it intended to quickly resell the property.
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However, the company retained the real estate, rented out the apartments and shops, and sold the building only in 2016 for 33.34 million shekels. At the 17% VAT rate in force at the time, the tax due on the sale could have reached approximately 5.7 million shekels.
Court did not allow a change in approach
The company argued that the VAT refund at the time of purchase had been erroneous and asked to be allowed to return this amount to the tax authority. In its view, this could have created grounds for exempting the sale from VAT. The court disagreed with this position and applied full VAT to the entire sale price.
Israeli law allows businesses to recover VAT on purchases if they are used in VAT-taxable transactions. At the same time, income from renting residential property under a contract of up to 25 years is exempt from this tax. The court noted that the apartments had been rented out for eight years and that the company had already received a VAT refund upon purchase, so it was not allowed to change the tax treatment retroactively.
