Our February 2026 Tax Newsflash features a landmark ruling with dramatic real estate sector implications.
We are pleased to announce of the recent publication of an important landmark ruling handed down by the Appeals Committee for Real Estate Taxation in the Haifa District Court, in favour of Ashdar Building Company Ltd., a member of the Ashtrom group and represented by our firm under the stewardship of Leor Nouman, head of the firm’s Tax Department. As we will explain shortly, the implications of the ruling are dramatic and have shaken the “Buyer’s Price” (Mechir LaMishtaken) domain.
It was determined in the ruling that the leasehold rights granted to developers and contractors within the framework of “Buyer’s Price” (Mechir LaMishtaken) tenders, do not amount to a “land right”, as such term is defined in the Land Taxation (Appreciation and Purchase) Law, 5723-1963 (the Land Taxation Law) and, therefore, are not subject to purchase tax. This entails a judicial decision with significant far-reaching implications, that has given rise to an entitlement to purchase tax refunds for many developers and construction companies, in the scope of hundreds of millions of shekels.
The focal point of the proceeding concerned a principled dispute that questioned the nature of the engagement in “Buyer’s Price” (Mechir LaMishtaken) tenders. The Appeals Committee was therefore requested to consider the question—whether the developer that engages in a “Buyer’s Price (Mechir LaMishtaken) project purchases a leasehold right for generations (and, thus, is subject to purchase tax), or if it concerns a unique contractual array in which the developer acts as executing contractor, for the purpose of realizing State policies in a way that does not confer it with “the economic benefit” that is characteristic of a holder of a leasehold right (and thus is not subject to purchase tax)? After thoroughly examining the characteristic set of tenders and agreements in the “Buyer’s Price” (Mechir LaMishtaken) realm, the Appeals Committee determined that the right granted to developers does not allow them to hold and use the land for their economic benefit.
It thus ruled that the significant restrictions imposed on the developer within the ambit of the program (including subordination to the supervisory mechanisms, tight schedules, material restrictions on the sale of apartments and identity of the buyers), deprive the developer of the core components of controlling, enjoying, and deriving an economic benefit from, the land, which are characteristic of a “lessee for generations”. Moreover, it was determined that also at the level of the holding period, the developer cannot be perceived as someone who receives a definite and enforceable legal right to hold the land for a period exceeding 25 years, as required by law, this, in view of the “built-in” structure of the program, which obliges the developer to sell the apartments to eligible buyers within a short period of time. In light of these restrictions, it was held that the restricted right that is conferred on developers within the ambit of a “Buyer’s Price” (Mechir LaMishtaken) project does not establish a purchase tax liability.
It is important to mention that the appeal proceeding was conducted as a representative case in Ashdar’s case, alongside the representation of dozens of additional developers and contractors. At the same time, a unique arrangement was crystallized with the State Attorney’s Office with the intention of facilitating a lateral and efficient handling of the refund of purchase tax to developers who are party to the arrangement, and those who will become party to it in the future, by means of a regulated individual track, in accordance with the provisions of section 85 of the Land Taxation Law. The arrangement also includes a designated mechanism that may facilitate the receipt of tax refunds, even in cases where more than four years will have passed since the date of the assessment, all in accordance with developments and implementation measures that will be determined in consequence of the ruling.
It should be emphasized that this ruling might establish a basis for the return of purchase tax of significant scope to developers and contractors in “Buyer’s Price” (Mechir LaMishtaken) tenders as well as in follow-up “Reduced Price” and “Target Price” tenders. In view of the dramatic implications of the ruling, it is recommended that companies which have executed transactions within the framework of the aforesaid program examine the options for action at their disposal and consider taking the appropriate measures as soon as possible.
On 9 February 2026, the Israel Tax Authority (ITA) published Income Tax Circular 03/2026 which largely addresses the legislative amendments that were undertaken, within the ambit of the Economic Plan for 2026, for reducing the phenomenon of undeclared capital in Israel. As may be recalled, the purpose of the legislative amendments was to provide the ITA with additional tools for reducing unreported capital in Israel, the foregoing by means of integrated fiscal enforcement and synchronization between the various tax systems, so that violations in one fiscal domain will impact the parallel tax systems, in a way that will increase compliance in all systems. Below is a description of the main points of the Circular.
The guiding principle underlying this amendment is that a tax deduction or expense should not be recognized where the action for which the deduction or expense was claimed was performed contrary to law, and particularly when it comes to breaches of the duty to withhold tax at source or provisions of the Reduction of the Use of Cash Law, 5778-2018 (Reduction of Use of Cash Law). This principle was implemented by means of legislative amendments in the various tax systems, as detailed below:
– Where the provision of an expense constitutes a breach pursuant to the Reduction of Use of Cash Law, it will not be allowed to be deducted for income tax purposes.
– Restricting the deduction of an expense for income tax purposes owing to a transaction whose amount requires an allocation number, without a tax invoice for which an allocation number was duly assigned.
– Denial of a permissible expense for income tax purposes due to the failure to withhold tax at source and/or non-transfer of the sum withheld to the assessment officer.
– Restricting the input tax deduction for Value-Added Tax purposes where the consideration for which the invoice was given constitutes a breach of the Reduction of Use of Cash Law.
– In calculating the betterment tax applicable on the sale of a land right, the deduction of payments expended by a dealer, within the framework of his business, will not be allowed where it is decided that making provision for same constitutes a breach under the Reduction of Use of Cash Law.
The Value Added Tax Law, 5736–1975 (the VAT Law) imposes a detailed monthly reporting duty on dealers who satisfy the criteria set out in section 69A(g). This detailed report includes all invoices issued by the dealer and all tax invoices received during the relevant reporting period. Thus, amongst the criteria enumerated in section 69A(g) of the VAT Law, a minimum dealer transaction turnover threshold was determined for which the taxpayer is required to submit a detailed report. Prior to the amendment, the minimum dealer transaction turnover threshold necessitating the submission of a detailed report amounted to NIS 2.5 million per year. As part of the amendment, the detailed reporting duty was broadened, so that it will apply to any dealer whose annual transaction turnover exceeds NIS 500,000.
As part of the process of dealing with the phenomenon of fictitious tax invoices the VAT Law was amended within the ambit of section 38 of the Economy Efficiency Law. The amendment makes it mandatory to receive an allocation number for tax invoices whose amounts exceed the set ceiling, for the purpose of withholding the grossed-up input tax in such invoices. As part of the provisions, the amendment specifies that the entering of this mechanism into effect will be done gradually, such that in 2024 it will apply to invoices totalling NIS 25,000, in 2025—NIS 20,000, in 2026—NIS 15,000, in 2027—NIS 10,000 and in 2028—NIS 5,000.
In light of the success of the amendment and its contribution to reducing the phenomenon of fictitious invoices it was decided to accelerate its application, so that the amount for which an allocation number will be required for the purpose of withholding input tax decreased to NIS 10,000 (instead of NIS 15,000) as of 1 January 2026, and a further decrease to NIS 5,000 will apply beginning from 31 May 2026.
A ruling handed down by the Jerusalem District Court in appeal proceedings concerning Teva Pharmaceutical Industries Ltd. (Teva) was recently published. The court rejected the main points of the appeal filed by Teva regarding the assessment prepared for it by the Jerusalem VAT Director, and held that Teva is not entitled to withhold input tax for a transportation array operated by it for conveying employees to its various plants throughout Israel.
The relevant normative framework in the case at hand is regulation 15A of the VAT Regulations, which provides that input tax owed by a dealer for input on account of its employee cannot be withheld, unless it is proven that the input was sold to the employee or given to him as a service, and this fact is reported as a taxable transaction in the periodic report (according to market value). In this respect, it was necessary to apply the “direct and dominant beneficiary test”, in that where the main beneficiary of the input is the employee, input tax, as a rule, is not permitted to be withheld (unless the input is sold to the employee at market value and is reported as a transaction that is subject to VAT).
Teva’s counsel argued in this context that the expenses for the transportation array are clear business expenses that are designed to ensure manufacturing continuity, precise shift handovers and full synchronization between the production site employees, this, among other things, in light of pharmaceutical manufacturing characteristics and the strict regulatory oversight to which the company’s operations are subject. As contested by it, the company is the direct and dominant beneficiary of the transportation array, while the benefit to the employees is solely indirect. On the other hand, the VAT Director asserted that in most cases regular and reasonable public transportation is available to employees, and that the transportation array largely saves the employees time, bother and costs, and this therefore entails a benefit to employees that is covered under regulation 15A.
The court rejected the main points of Teva’s appeal and held that the company did not prove that the transportation array is largely intended to satisfy its own special need, in a way justifying that it be perceived as the direct and dominant beneficiary of the input, for the following reasons:
– Teva did not present sufficient evidence showing that a handover of shifts “as an integral unit” is a binding regulatory requirement, nor did it convincingly prove that the absence or tardiness of an employee would necessarily lead to a shutdown of the production lines, as asserted by it.
– When reasonable public transportation exists, even if this involves changing lines, the transportation will generally be considered as that replacing the use of a private vehicle or public transportation, thus saving the employees time, bother and financial expense and the tendency will be to view the transportation as a benefit for the employee.
– An employer’s desire that its employees will arrive on time for a shift is a natural interest shared by many employers and does not constitute a unique working condition.
– The use of transportation was not defined as an absolute duty, but rather as an “entitlement” for employees only, thereby supporting the conclusion that this is a private benefit for the employee and not a binding business need.
The court also maintained the view that the VAT Director had already recognized the ability to deduct input in relation to transportation expenses in “classic” cases of necessity, for example:
– Transportation to places where there is no regular public transportation or where there poses a real difficulty in getting there.
– Transportation during hours when public transportation cannot be relied upon—including shifts on Saturdays and holidays, late night shifts, and returning from afternoon or evening shifts during hours when public transportation is irregular.
The rationale, as determined by the court, is that when an employee has no practical possibility of getting to work using regular public transportation, the transportation becomes a real necessity for the employer—otherwise it is doubtful whether it would be possible to fill the positions and maintain quality personnel. On the other hand, where regular public transportation exists, transportation provided by and at the expense of the employer and which that makes getting to work easier will generally be classified as a benefit for the employee, being the direct and dominant beneficiary of such service.
The ruling continues and reinforces the downward trend in case law regarding the withholding of input tax for employment conditions and employee benefits, with emphasis being placed on the transportation arrays. In a reality in which many employers offer various benefits to employees as part of the employment terms (travelling, meals, welfare, etc.), it is recommended that a preliminary examination of the characteristics of the benefit, the absence of alternative possibilities and the scope of necessity of each and every input, be conducted.
* The newsflash is intended to provide subscribers with general information only and should not in any way be regarded as firm professional advice and/or a definitive legal opinion.
