Israel imposes VAT, generally at a rate of 17%, on transactions relating to assets and services in Israel. But securities (shares and bonds) are generally excluded from the definition of assets.
However, the Israeli Tax Authority has just published a Tax Ruling saying that VAT applies to a purchase of shares or rights in Israeli real estate entity, i.e. an real estate company, partnership or fund that invests primarily in Israeli real estate (Tax Ruling 6326/16).
The facts of the Case:
In the facts of the Ruling, two shareholders in an Israeli real estate entity agreed to sell their shares to a third company. The sellers and the purchaser were each registered as a Dealer for VAT purposes (the regular type of VAT registration). The purchaser sought permission to recover the VAT in the usual way as input VAT on its purchase of shares in the real estate entity.
The Ruling Analysis:
The Ruling quotes various definitions in the VAT Law.
An “asset” is defined as goods or real estate. A “sale” is defined in the case of real estate as including an act relating to a real estate entity as defined in the Real Estate Taxation Law. A “transaction” is defined in the VAT Law as, among other things, a sale of an asset or giving a service by a VAT-registered Dealer in the ordinary course of its business.
A “real estate entity” is defined in the Real Estate Taxation Law as an entity in which all its assets, directly or indirectly, are rights to real estate, except for an entity the rights in which are listed on a stock exchange as defined in the Income Tax Ordinance.
For these purposes, assets of an entity are disregarded (i.e. won’t detract from the definition of a real estate entity) if they are cash, shares, bonds, other securities, chattels that do not serve to generate income or, they generate income but in the opinion of the Tax Director they are secondary to the main objectives of the entity that are carried out in practice and not temporarily.
An “act relating to an entity” is defined in the Real Estate Taxation Law as the grant of a right in an entity, or its endorsement, transfer, waiver, change in rights derived from a right, whether for consideration or not, but not an allotment (allocation); an allotment means an issue of rights in an entity that were not previously acquired, the consideration for which was not paid, wholly or partly, to any of the rights holders in the entity.
The Ruling Result:
The Ruling concludes that the sale of shares in an entity falls within the above definition of a “transaction” in the VAT Law, since there was a sale of an asset by Dealers in the field of real estate on the course of their business.
Such a sale is liable to VAT based on the consideration agreed between the parties.
Since the purchaser intended to carry out transactions with those shares that are also liable to VAT, it could recover the VAT on its share purchase based on a valid Tax Invoice issued by the selling shareholders.
This Ruling may have broad ramifications.
Many real estate investment funds are organized as real estate funds.
Anyone buying shares or other rights from another investor in an Israeli entity should check if it is a real estate entity (Igud Mekarkain) according to Israeli tax law. If so, that purchaser may have to pay 17% VAT.
Anyone on the selling side should check whether they need to collect 17% VAT on the sale proceeds
Such VAT is only recoverable if the purchaser is registered for Israeli VAT purposes as a being a “Dealer” doing in business in Israel. All this applies to both Israeli and foreign investors.
Registering as a VAT Dealer doing business in Israel (to recover the 17% VAT) has a price – registering for Israeli income tax purposes too, keeping approved books and reporting monthly or bimonthly to the Israeli Tax Authority.
A purchaser has 6 months to recover VAT on a valid Tax Invoice – if the purchaser is not yet registered as a Dealer for VAT purposes, it should consider doing so fast.
The Ruling apparently only applies to entities whose assets are Israeli real estate. If that company owned, say, a building in Tel-Aviv and a building in Manhattan, it may not be a real estate entity, but check it out….
To sum up, never forget VAT, and Caveat Emptor, let the buyer beware.
As always, consult experienced tax advisors in each country at an early stage in specific cases.
The writer is a certified public accountant and tax specialist at Harris Consulting & Tax Ltd.