A recent Supreme Court case struck down a real estate trust because it didn’t
really exist at the relevant time. Consequently, one party to a land deal paid
acquisition tax of 5 percent on the entire value of the deal, including future
building rights, and another party was taxable on a deemed gain. If only they
had gotten the trust right.
Real-estate trusts are dealt with under
Sections 69-74 of the Real Estate Taxation Law, and regular trusts are dealt
with under Section 75(c) of the Income Tax Ordinance, for Israeli tax
A trust relating to real estate interests in Israel must be
reported to the Israel Tax Authority (ITA) within 30 days.
There is also
Trust Law, 1979.
But are real-estate trusts different in substance from
other trusts? The answer is yes.
The case in question was Nadbach Real
Estate and Investments Ltd. (to be referred to as N) and A. Dory Engineering
Works Company Ltd. (to be referred to as D) vs Land Appreciation Tax Director
Central Area (Civil Appeal 8116/08 handed down August 2).
The facts N was
a subsidiary of Israel Discount Bank responsible for property management. The
bank decided to combine its managerial offices, which were in different places,
and buy a plot of land in Ramat Gan to build an office block. On December 16,
1999, an agreement was signed whereby D, a builder, purchased the
On December 29, 1999, N and D signed two agreements: The first said
D purchased the site in trust for N; the second said D undertook to provide
construction services and build the office block for N.
On January 13,
2000, the parties notified the ITA of the trust.
On January 16, 2000, the
parties filed a notice that D was transferring its rights in the land site to N
without consideration as a transfer from a trustee to a
Accordingly, the parties claimed an exemption from the 5%
The ITA turned this down and demanded to tax the
transfer as a sale at full value, including also the value of the building to be
constructed. All this was on the grounds that there was no trust in effect in
the two-week gap from December 16-29, 1999.
Was there a trust? According
to the court, Section 69 of the Real Estate Taxation Law and Section 27 of the
Acquisition Tax regulations do indeed provide exemptions from the 5% acquisition
tax and land appreciation tax (capital- gains tax on Israeli real estate) upon a
transfer from a trustee to the beneficiary. But to enjoy the first exemption,
the court ruled that the trust needs to exist on the date the trustee purchases
Section 69(b) of the above law defines a trustee as “a person
that holds in his name for another a right to real estate or a right in a
This definition is not necessarily the same as a
trust under the general law. The trustee under Section 69 lends his name to
another person who purchases the interest in real estate or a real-estate
entity, without the trustee having any economic interest of his own in the real
In this case, the court ruled it was highly doubtful that D
lacked any interest in the real estate. In substance, the site purchase and
construction by D for N represented a single transaction.
factor is how things were handled in practice, not how they could have been
handled. In this case, the parties did not manage to prove the existence of a
trust relationship asserted in the trust agreement existed before then, when the
land site was acquired.
Even if such an agreement doesn’t have to be in
writing, its absence is telling, especially given the status of the two parties
(one of Israel’s main banks and one of Israel’s major building firms).
Furthermore, the trust relationship was not mentioned in any of the bank’s
various documents discussing the project.
Initially, D acted as an
independent developer, albeit in cooperation with N, and only later did the
parties decide to define their relationship as a trust. That was apparently
after they realized the tax consequences.
Value of the deemed sale The
term real estate is defined as land in Israel, including houses, buildings and
other permanent fixtures on the land. The court ruled that the site purchase and
agreement to build on the site amounted to a single transaction. The parties
were identical, the agreements were signed on the same date, and the content of
the agreements reveal they were linked.
What can we conclude? First, get
the technicalities right: The two-week gap before a trust was asserted was
Second, a real-estate trust is more of a nomineeship or agency:
The trustee holds an asset in his own name on behalf of the real owner. In a
general trust, the trustee is the legal owner of the asset held in trust for the
present or future beneficiaries.
Third, the acquisition of land and
construction services in two separate transactions to save tax does not work.
Recently, the government announced it would put an end to similar practices
sometimes employed by real-estate purchasing groups, which have been popular
until recently in Israel.
Fourth, what about escrow arrangements? For
example, suppose a purchaser deposits cash with a lawyer until he gets title; is
that escrow reportable as a “trust” under the Real Estate Taxation Law? Some
claim the escrow is not reportable as a trust if cash is in escrow, not real
Fifth, the above-mentioned trust reporting rules only
apply to real-estate interests in Israel, whereas the requirements of the Income
Tax Ordinance govern other trusts in Israel and abroad.
consult experienced tax advisers in each country at an early stage in specific
Leon Harris is an international tax
specialist at Harris Consulting & Tax Ltd.