There has been a recent flurry of important real estate tax cases in Israel. The cases relate to hotel companies, Value Added Tax (VAT), and transparent house property companies. If you have a financial interest in Israeli real estate, read on and consult your real estate tax advisor.
Hotel Company Case
The Israeli Supreme Court has just ruled in the Nitsba case that buying shares in a hotel company is liable to real estate purchase tax (Nitsba Holdings 1995 Ltd Vs Real Estate Taxes Director, Civil Appeal 470/24, handed down 10.6.26). In doing so, the Supreme Court cast doubt on Israel Tax Ruling 38/07, which says the opposite.
Background
Purchases of Israeli real estate are subject to purchase tax of up to 10% (plus 18% VAT sometimes). This also applies to purchases of shares in an Israeli real estate entity.
Israel also has anti-avoidance rules that deem real estate entities to be taxable just like the real estate they hold. A real estate entity (Igud Mekarkain) is essentially an entity (usually a company) in which all its assets, directly or indirectly, are rights to Israel real estate, except for securities listed on a stock exchange or real estate investment trusts.
But the following assets are disregarded: “cash, shares, bonds, other securities and movable property which do not generate income for the real estate entity or are marginal to the main objectives of the entity…”
The issue in this case
Is a company with a hotel in Eilat, a popular coastal resort, a real estate entity or a business?
Main facts
In this case, Nitsba, a well-known property developer, purchased the shares of Lexan in 2015 for NIS 285 m., a company which owned the Princess Hotel in Eilat. However, the hotel was in a bad state and was immediately closed for “massive” renovations.
A contract with Isrotel to manage the hotel was terminated after 41 days. The renovated hotel was due to reopen in 2020, but it was burnt down at the end of 2019 and had not reopened by 2026 when the case was heard. Because Lexan appeared to be a real estate entity, the Israeli Tax Authority assessed purchase tax of NIS 17 m.
The taxpayer appealed, claiming that Lexan was not a real estate entity according to Tax Circular 38/07 because it operated a hotel business, not movable property, and although the hotel closed for renovations, all hotels need renovating.
Court analysis and judgment
The Supreme Court ruled that Lexan was a real estate entity liable to purchase tax. An asset test is applicable. Purchase tax is due if all the company’s assets are real estate.
The Court noted that in an earlier case, Gazit Globe, a shopping mall company was found to be a real estate entity because its business activity was not independent and separate from real estate.
In the Nitsba case, a lower court had already ruled that factually speaking, the taxpayer did not buy an “alive and kicking” hotel but one about to be closed.
The Court saw that, in another case, the same taxpayer had expressed interest in buying then flipping (re-selling at a profit) a different property via an auction and wondered whether the same was happening here (Paras.35-36). A property flip would make Lexan a real estate entity.
The Court ruled that the taxpayer had failed to prove that when it acquired the company’s shares, the hotel was a going business concern separate from the real estate component.
What about management contracts?
The Supreme Court noted that many hotel operations in the US and elsewhere have an “asset-light business model” where one party owns the hotel property, another manages it.
Are the management fees active business income or passive rental income for the property owner?
The Supreme Court concluded generally that management fees are passive rental income if the property owner “hedges” its risk of losses by: (1) receiving a revenue share, not a profit share, and/or (2) receiving a fixed minimum fee. In this case, the Supreme Court found it unnecessary to rule whether loss hedging had occurred in this case.
Comment
Real estate entities are subject to purchase tax and other strict Israeli tax rules, e.g., upon a property sale. A hotel company is a borderline case. Users should review the use of the main assets and any management fee formula, among other things.
As always, consult experienced professional advisors in each country concerned at an early stage in specific cases.
leon@hcat.co
The writer is a certified public accountant and tax specialist at Harris Consulting & Tax Ltd.
