Court confirms that the Transfer of Land in Israel to a Trust is Exempt from Land Betterment and Purchase Tax
We wish to inform you of the publication of an important ruling passed a few days ago by the Land Tax Appeals Committee (Tel Aviv District), in the matter of Samuel Gellis v. Director of Tel Aviv Land Betterment Tax .In short, the question discussed in the ruling was whether the legislation in the fourth chapter (2) of the Income Tax Ordinance ("the Ordinance") dealing with trusts could be applied to the transfer of real estate in Israel under the Real Estate Taxation Law ("the Law"). Under the Ordinance, a transfer of an asset to a Trustee made for no
consideration, shall not be considered a taxable sale in respect of provisions of the Ordinance.
In a long, detailed and unanimous decision, the appeal was accepted. The Court determined that provisions of the Trust chapter of the Ordinance and the specific arrangement therein, according to which transfer of an asset for no consideration from the settlor to the Trustee is not considered as a "sale" and is postponed until the property is sold by the Trustee or until the date of its distribution to a beneficiary – shall also apply to land assets in Israel.
The Committee determined that there is no justification or logic to support a conclusion that transfer to trust of shares in an industrial company or real estate abroad will not be subject to tax, whereas the transfer to trust of shares in a real estate association or property in Israel shall be considered as a taxable event. According to the Committee, accepting the position of the Land Taxation Authority will lead to an unjust tax result.
The applications of this ruling are significant. Under the Law, a gift of real estate in Israel between siblings is not currently exempted from betterment tax (except in cases where land was inherited/given as a gift from parents), and subject to purchase tax. However, if the real estate is settled trust by one brother for the benefit of his sister, no tax will apply. Moreover, parents an transfer property to trust in favor of one of their children and then add other children to the same trust without creating a tax event for any of the parties.
Moreover we believe that the ruling enables taxpayers to request tax refunds with respect of purchase and betterment taxes paid over the past four years in respect of transfers of assets to rust, as the collection of these taxes was unlawful.
The Israel Tax Authority is expected to appeal the ruling in the Supreme Committee.
The purpose of this memo is to bring to your attention general information on various issues. The provisions of the law are more complex and include additional exceptions.
Accordingly, the contents of this memo should not be implemented without consulting the appropriate professionals at our offices.