What is a combination sale of a partial sale, what taxes apply to it and how is the tax calculated?
The deal is not complicated, but how do you calculate the tax?
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A combination transaction of the partial sale type is a type of exchange transaction between an entrepreneur and a landowner.
In this transaction, the landowner sells to the developer part of the land he owns, and in return he will receive housing units in the future, which the developer will build on this land.
The combination agreement essentially includes two transactions: the sale of part of the land from the owner to the developer and the provision of construction services to the owner by the developer.
Since in this transaction the consideration for the owner is in construction services and not in money, the question arises as to how the sale value will be determined for tax purposes.
This is answered below.
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The value of the sale
How is the sale value determined?
Unlike a regular real estate transaction, in which the consideration is specified in the sale agreement, in a combination transaction there is no fixed price for the transaction.
Which requires the assessee's branch to conduct quality and exhaustive negotiations with real estate taxation, to determine the most correct value, in order to arrive at a real tax.
The value of the transaction can be examined on the one hand according to the land sold by the landowner to the developer.
That is, by the value of the land sold.
On the other hand, according to the consideration received by the landowner from the developer, in accordance with the principle of "rule of consideration", which is determined in court rulings.
That is, according to the value of the construction services and plus additional payments borne by the developer for the owner.
It seems that the expectation is that there will be equality between the parties to the equation, between determining the sale value according to the value of the land and determining the sale value according to the value of the construction services.
However, the reality on the ground leads to the conclusion that there is a difference between the two calculations.
The difference can be significant, and as a result the tax charge which is derived from the said sale value, may be significantly higher than the initial estimate.
The cost of construction
What are the costs of construction services for the developer?
When the developer reports the sale value according to the costs of the construction services for the purpose of determining the tax, it does not mean how much it costs him to build a net.
That is, some cost the contractor the blocks and other materials.
It must be examined how much it would have cost the landowner if he had taken an operating contractor to build him the same housing units?
After all, if he buys construction services from a contractor, he will not only pay him for the blocks, but also the overheads, consultants, management and general, his office, contractor profit, perhaps also in km (unpredictable component) and so on.
The value of construction services is basically how much it costs to purchase these services from another external contractor, and not just how much it costs a contractor to build (plus an acceptable entrepreneurial profit).
It should be noted that the burden of proving the value of construction services rests with the taxpayer.
At the assessment stage, the developer's zero report can be used to determine the sale value, if any.
The question arises as to whether the Tax Authority may withdraw from the determination of the sale value and retrospectively examine the determination of the said value, at the time when the construction work began.
The Supreme Court ruling in the Florentine Corner case determined that later developments in the transaction would not change the value of the sale determined.
Implementing Directive 23/98 of the Tax Authority stipulates that in principle the costs of construction services should be governed by, unless there is a significant difference between the value of construction services and the market value of the land, then it is likely that the assessment by the tax authorities will be determined by the market value of the land.
Sale day
What is the day of the sale?
The basic rule in tax law is that the day of the sale is the day the contract is signed, as is the case in an ordinary combination transaction in accordance with the rule established in the Eldar Sharon case. Usually at this time there is uncertainty as to whether the transaction will materialize.
Since most combination transactions, which do not involve a cash payment, may impose a heavy tax burden as early as the date of signing the agreement, the possibility of postponing the day of sale so that the date of the tax event is postponed to a later date should be considered.
The Real Estate Tax Law allows for the postponement of the day of sale in combination transactions if a number of conditions are met: the entire consideration for construction services and not all of it is in money;
The deal is conditional on the approval of a new plan (which as of the date of signing the agreement is not known how many meters it will give to build).
In such a case, at the stage of signing the agreement only, notice is submitted of the postponement of the day of sale until the approval of the plan.
On the day the plan is approved, the assessee has planning certainty regarding the building rights and construction costs for the developer.
Additional considerations must be taken into account in relation to the postponement of the day of sale, such as the fact that the sale value after the approval of the new plan is expected to be higher, and as a result the tax applicable to the transaction will also be higher.
Where the day of the sale cannot be postponed, the possibility of postponing the date of payment of the tax until the date of delivery of the consideration apartments must be considered under certain conditions (interest charges and lawful linkage differences will be added to the tax fund).
There are taxes
The taxes applicable in a combination transaction include:
Appreciation tax - for the sale of part of their rights to the entrepreneur.
Purchase tax - for the purchase of some of the rights in the land.
Improvement levy - which applies to landowners in respect of the sale of their rights in relation to plans approved up to the date of execution of the transaction.
VAT for the sale of the rights by the owner to the entrepreneur who is registered as a dealer for VAT purposes.
VAT is charged since this is a random transaction (assuming the owner is not registered as a dealer).
VAT construction services - for the provision of construction services to owners.
Gross net
Several points to consider when entering into a combination transaction:
Net transaction / Gross transaction - on the one hand, there are advantages to entering into a net transaction, according to which the developer bears all the tax payments arising from the transaction.
On the other hand, all the tax aspects applicable to the transaction must be examined, including the possibility of reducing the goodwill tax rate (historical tax rate, spread of goodwill tax, partial exemption if an apartment is built on the land, etc.).
The cash flow for the tax payment must also be taken into account.
In a combination transaction in an old apartment building on which a new building is planned to be built, the possibility of making a combined transaction of a full sale on part of the land and a partial sale on the rest of the land must be examined.
When a number of apartments are received in the combination transaction, the method of selling the apartments must be examined, in order to avoid exposure to marginal taxation in income tax and VAT (classification as a random transaction / classification as a business), either in a gradual sale procedure or by examining the possibility of applying the Capital Investment Encouragement Law. (Building for rent).
In collaboration with attorney Adi Ben Yair-Yosef and accountant Limor Wagner
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