Adv. Orit Koch, globes.co.il.

The entrepreneurial real estate market is based on the possibility of financing most of the project cost from loans . Most of the financing comes from various banking or institutional bodies. However, entrepreneurs often seek assistance with private financing , either for financing the required equity or for financing the entire project.

In this secondary market there is a taxation priority for individual lenders: while a company will pay on interest income generated by normal corporate tax (today 23%), an individual will pay on interest income from a loan that is not linked to the index only 15% tax.

Is this tax advantage retained even when the loan is given not in exchange for a fixed interest rate but for a percentage of project profits? In this case, will the agreement between the parties still look like a "loan" agreement and the lender's income will be classified as "interest" income at a 15% tax rate or is it actually a " partnership " agreement and then the lender's income will be classified as income from a taxable business at a marginal tax rate?

Furthermore, if it is a "partnership" that was cut after the borrower purchased the rights to the land, did the lender / partner purchase some of the rights in the project and therefore also pay a purchase tax?

The answer depends on the circumstances

This question reached the Appeals Committee as early as 2004 (and 1020/01 AR Eli ram Ltd.). The same matter relates to an agreement under which the appellants undertook to finance all project expenses, and to provide the guarantees required to obtain bank financing. The loans will be made only after covering all project expenses and only if sufficient funds are left to repay the loan. After analyzing the agreement's provisions, the appeal committee stated that in this case this is not a loan agreement but a partnership agreement under which property rights have been vested and therefore the tax evasion was charged.

Of course, the result of this classification as a purchase of real estate rights is that it is concluded that the profits generated by the appeal are profits from the sale of real estate and not profits from interest.

This issue has recently arisen in the framework of PA 63863-12-14 regarding PA. Aryeh Friedman (2000) Ltd. In this regard, the tax assessors of real estate sellers who requested that interest paid on sale of a loan taken to finance the purchase of land were reduced from the sale profit. The loan agreement stated that the basic interest rate would be 8% plus interest paid to the lender. Another is calculated as a percentage of the borrower's profits in the sale of the property. The Praise Tax Manager agreed to recognize interest expense at the basic interest rate only (8%).

The Appeals Committee noted that, "It appears that the respondent's position is that the interest rate increase, based on sales profits, is not an interest rate exam and is not an examination of financing expenses," and brought the matter back to the Board of Appraisal Tax.

It seems therefore that the question in the title does not have an unequivocal answer, and the answer depends on the circumstances of each case. The more supervisor and project / transaction control rights are given; The more he risks his money (as in the case of Eliram, where it was agreed that loan money would be settled to borrowers only if the funds were left with sufficient funds for that purpose) - the more the courts would tend to regard it as "partner" rather than "lender".

In contrast, in case the lender has no supervisory or controlling rights in the project; And that the loan agreement stipulates repayment dates and there is a clear obligation to repay the money - so will the tendency to see the agreement as a "loan" agreement whose income is owed at a special tax rate.