Globes, Adv. Meir Mizrahi, 18.10.2020

In construction eviction transactions there are some tax reliefs, such as exemption for landowners from praise tax for the sale of the old apartment. In addition, the tenant is exempt from purchase tax in respect of the receipt of the alternative apartment and monetary consideration up to the level of the exemption value ceiling. In addition, section 31A of the Value Added Tax Law stipulates that the provision of construction services to the rights holders in exchange for the apartment sold will be subject to zero-rate VAT, under various conditions.

Recently, we have witnessed a phenomenon where the developer gives apartment owners the option of getting an alternative apartment elsewhere. For tenants, this saves moving and adapting, and the developer has savings in high costs of alternative rent, transportation, etc.

According to Taxation Decision 6644/12 issued by the Tax Authority, if the alternative apartment obtained in the other complex is owned by the developer, or even if the developer purchases the alternative apartment for the third party rights holder, the tax exemption provisions will apply up to the exemption ceiling. The seller will be entitled to an exemption from praise tax on the sale of his old apartment and an exemption from purchase tax on the purchase of the new apartment in the other complex.

In our opinion, in these cases it can be argued that the developer will be subject to zero VAT. However, it should be noted that in the event that the developer purchases the alternative apartment in the other complex from a third party, additional liability will arise from purchase tax to the developer.

If the tenant is faced with the option of choosing between receiving an apartment in the evacuated complex, and receiving an apartment in another complex, it is recommended to inform the developer of the desired choice before meeting the conditions precedent in the agreement and before receiving the building permit. If the selection is made afterwards, the selection action may be considered as a separate transaction from the construction eviction transaction, and therefore the said exemptions will not be granted. Therefore, tax liabilities will arise as an exchange transaction in which the owner will be seen as selling an apartment to the developer, without entitlement to an exempt residential apartment, and the developer will be liable for purchase tax. On the other hand, the owner will be seen as purchasing an apartment from the developer, for which he will be liable for purchase tax.