Globes, Adv. Meir Mizrahi, 31.05.2020

Background: A residential apartment is a major asset of every family in Israel, and the tax issues involved are important and affect, among other things, the rate of purchase tax that will be charged in the garden. When the property being purchased is a residential apartment, the trend of the Real Estate Taxation Law is to ease the purchase tax rates, if it is the apartment which is the purchaser's only apartment. In contrast, if the purchased apartment is not the buyer’s only apartment, the purchase tax rate will be even higher than the purchase tax rate in the case of land acquisition - 8% versus 5% -6%.

How to determine the classification of the property: In the case before us, the appellants were given real estate rights as a gift from their relatives. For those real estate, a combination deal was previously signed under which a contractor pledged to build residential condominium lenders. The Real Estate Tax Administration sought to classify the rights obtained as a gift as "residential apartments". On the other hand, the appellants claimed that they had purchased land, which owes a lower rate of purchase tax in the circumstances.

The solution to the dispute between the parties lies in the definition of "residential apartment" for the purpose of purchase tax under section 9 (c) of the Land Taxation Law. By this definition, even an apartment whose construction is not yet completed may be considered a residential dwelling, "except for an apartment with no obligation on the part of the seller to complete the construction". In that case, the waiters did not commit themselves to finishing the construction. However, the appellants received from the gift givers a property which includes a commitment to complete the construction of the apartments by the contractor.

The question at issue was whether the contractor's commitment to finish the building was considered a "seller's obligation", then the properties received as a gift would be classified as residential.

Decision: The Court held that the interpretation of the term "residential apartment" is a broad interpretation. This arises from the definition itself, which gives great weight to identifying the property that is to be erected on the property, and the intention of the buyer to designate the dwelling in the future within a reasonable time (see Friedman Law - P 278/84).

In this case, in terms of the economic content of the transaction, it is a transferable, enforceable rights bundle and includes a commitment to complete the construction of the apartment. This is similar to a constructive contractor's commitment when selling "apartment on paper".

In addition, the gift recipients protested the appellants' rights to the contractor, so that even under the agreement - if the contractor did not meet his obligations and did not complete the construction, the appellants had a right to sue him.

Emphasis should be placed on the requirement that the purchaser receive a property with which a pledge, which was already in the seller's possession, is brought to completion. In such a case, gift givers can be treated as having a commitment to finish construction and in any case they may pass this obligation on to other recipients - gift recipients. Therefore, in this case it can be said that it is a commitment by the seller to complete the construction and classify the assets transferred as a gift as a dwelling.

The court also added that the examination of the value of the transaction also leads to the same conclusion - the land transferred is not the land held by previous lenders for the combination transaction, but real estate whose land is more limited and includes a commitment to complete construction. Therefore, the value of the transaction reflects the nature of the transaction - the transfer of finished apartments.

In summary, the court has broadly interpreted the term "obligation on the part of the seller", in a way that also includes an obligation that the seller has passed on to the buyer, and that the party responsible for its execution is a third party (entrepreneur / contractor.)