Recently, the Supreme Court handed down a judgment concerning the question as to the law applicable to the imposition of betterment tax when cases where the land is held by a developer under a development contract. A development contract is a contract by terms of which the developer undertakes towards the Israeli Lands Administration Authority, or towards the local authority, to develop the land in preparation for a lease or ownership agreement. At that stage, the authority is enabled to supervise the manner in which the land is developed. This question was previously addressed a few years ago in a judgment known as the Kanit Case (RLA 85/88 'Kanit" – Management, Investment and Finance Ltd Management Ltd v the Ramat Gan Local Planning and Building Committee, PD 42(4) 782 (1989)). There was a dilemma whether to regard the rights granted to the developer during the period of the development as owner/long lease rights (in which case the developer should be subject to betterment tax) or is the developer only a license holder (in which case the developer is exempt from the tax). The majority in the Kanit Case, led by the judgment of His Honor Mr. Justice Barak, found that this was only a license holder and so there is no obligation to pay betterment tax.
The subject reached the Supreme Court in the context of two cases, and the hearing of them was joined. The first case concerned a development contract of Honigman company with the Rishon LeZion Municipality for the construction of a building within 48 months, in accordance with the provisions of a tender, with ownership being transferred to the developer at the end of that period. Honigman objected to the obligation to pay betterment tax. In the second case, a development contract was signed between Linir Kirschner Company Ltd and the Israeli Lands Administration for a lease for 49 years and Linir also objected to the payment of betterment tax. Both companies claimed to be mere license holders.
In her judgment, Her Honour Ms. Justice Daphne Barak-Erez found that it is necessary to update the Kanit Case, such it is possible to regard the developer as a long lessee during the development period for the purposes of payment of betterment tax. If this is not the case, then it means that the developer, being the holder of the main economic interest in the land and the one who reaps the fruit of the improvement from the development, is exempt from paying betterment tax. This contradicts the purposes of the legislation and the principle of distributive justice. It also leads to much litigation due to uncertainty in the interpretation of tax laws. From a substantive point of view, judicial precedent based on the recognition that developers - being those who really control during the development period – are holders of long leases is justified. The Court emphasized that from a practical point of view, developers who already paid betterment tax to the Land Administration Authority will have their payment returned and then will be charged at a tax rate as a long lessee.
Reference: CA 7084/13 Bar Yehuda Ltd v the Shomron Local Planning and Building Committee (published in Nevo 10.5.2016); RLA 85/88 'Kanit" – Management, Investment and Finance Ltd Management Ltd v the Ramat Gan Local Planning and Building Committee, PD 42(4) 782 (1989)
