The District Court has ruled that taxpayers cannot break an agreement with the Israeli Tax Authority (ITA) by suddenly filing a legal opinion that took a different position (Weiss vs. Large Enterprises Assessing Officer, civil appeal 7265-02-23 of Oct 16, 2025). As explained below, the Israeli tax Authority also cannot back out of an agreement with a taxpayer – but they sometimes need reminding of this….
Main facts:
The taxpayers in this case were a husband and wife. The wife owned 8 owned commercial properties which she received by way of gift or inheritance, The husband owned two residential apartments. The couple held shares in a company which owned 5 more company properties. All the properties were rented out.
The husband also happened to be 100% disabled for the purposes of Income Tax Ordinance Section 9(5). This section grants a larger exemption for active income (currently up to NIS 684,000) and a smaller exemption for passive income (currently up to NIS 81,960).
So the couple claimed his exemption against her rental income and said it was active income. They wanted the larger exemption.
But the ITA didn’t like this one bit, and persuaded the couple sign assessment agreements covering the years 1995-2001 and again covering the years 2011-2014. These stated that in those and later years, only 15% of the wife’s rental income would be allocated to the husband as his active rental income.
However, six months after signing the second agreement, the couple filed a joint tax return for 2015 and claimed an active income exemption for 100% of the wife’s income.
The ITA took a dim view of these tax planning shenanigans. But were they legal?
The issues:
The main issues were:
(1) is the rental income active or passive?
(2) Can a joint tax return be filed?
(3) Can the husband’s disability exemption be used against the wife’s rental income?
The judgement:
The Court found that the rental income was indeed active business income, due to the number of properties, their management and the knowledge needed of the real estate market.
The Court also found that joint tax returns were allowed by the tax law. Moreover, the Court said that the husband’s disability exemption could in principle be used against the wife’s property rental income in a joint tax return.
Nevertheless, there was a problem….
The 2011-2014 tax assessment agreement included a stipulation that the agreement would continue to apply to later years. Therefore, the Court ruled that the couple had to stick to the ruling in later years. That meant the taxpayer couple could allocate only 15% of the wife’s rental income to the husband in the subsequent year concerned, as previously agreed with the ITA.
An agreement is an agreement:
The Court was emphatic about keeping to agreements: “To conclude, when the appellants (the couple) chose to sign the assessment agreement for the years 2011-2014…which included an express obligation to apply it also in subsequent years, given the process before the signing, the appellants also gave their agreement to this percentage (15%) in subsequent years and thereby waived any other claims. In this way the compromise is adopted and no deviation from is allowed, certainly not unilaterally without evidence that the specific factual or legal circumstances justified it, even if it emerged with hindsight that the agreement isn’t worthwhile for one of the parties…The result is the appellants are committed to the assessment agreement and everything agreed in it…”
The Judge based this on an earlier verdict handed down by the same Judge in the Bichacho case (District Court 16.11.22, 1912-06-20). In brief, that case ruled that the ITA cannot change or go back on an assessment agreement in later years. The Court ruled that the “each year is separate” rule does not apply to the same transaction in later years.
And the District Court based its judgement on a Supreme Court decision in Flying Cargo Vs. the ITA Ramleh Assessing Officer (8.4.21 7615/20). In that case, the Supreme Court told the Ramleh Assessing Officer not to go back on a District Court judgement regarding the same transaction that continued into subsequent years. Consistency is needed
Comments:
In short, an agreement is an agreement that cannot be changed unilaterally by a taxpayer nor the Israeli Tax Authority.
This refers to “assessment agreements” reached after the relevant transactions took place according to the above cases (ITO Section 152).
As for advance tax rulings, the law expressly says that they also cannot be changed unless there is a change in the circumstances (ITO Section 158F).
Next Step:
Please contact us if you wish to discuss the above or any other Israeli business/tax topic.
As always, consult experienced tax advisors in each country at an early stage in specific cases.