What is municipality taxes? When and how do you charge? What is the two-stage collection model?

3 planning actions have been established by law as having the potential to create liability for the tax: approval of a plan, relief or extraordinary use.

"Plan" - mainly refers to a local or detailed outline plan in certain circumstances nationally as well. An example of a plan that creates a liability in municipality taxes, for example a plan that changes the designation of land from agriculture to residential. As a result of the change, the value of the land increased and half of the increase in value is paid as an improvement municipality tax.   

"Easing" - refers to permission to perform work that is subject to a permit and is a deviation from plan instructions. For example, permission to build an additional floor in a building on the number of floors allowed for construction according to the plan that applies to the area.

"Extraordinary use" - refers to the use of land or a building for a purpose that was not allowed to be used. For example, operating an office in a place intended for storage. As a result of the new use, the value of the property and the same taxes increased.      

The historical idea behind the collection of municipality taxes is that those who profited from urban planning procedures, will bear participation fees to cover the costs, for example the costs of preparing a plan. Contrary to the historical idea, in the rulings of the courts today, the justification for charging an improvement levy is focused on aspects of social/distributive justice. It is written in the ruling that it is fair that those who get rich from planning activities of the authorities should share their enrichment with the public.

There is a difference in law between The planning action that results in a charge for the improvement municipality taxes and between Date of payment of the tax. While the charge is consolidated at the time of approval of the planning action, the date of payment is set at the time when the owner of the real property exercises his rights. It's called – "The exercising principle".

The "excising principle" in the improvement municipality taxes corresponds to the excising principle in tax law. According to the principle unrealized profit is not taxed. Exercising rights in real estate with reference to the municipality taxes can take place in 3 different situations: in the sale of the property, when starting to use it or when taking out building permit.

The most common case where a excising event takes place is in the sale of a residential apartment. If, before the sale of the apartment, a debt was accumulated in municipality taxes following a planning action (for example, a plan was approved that allows to expand the area of ​​the residential apartment), then at the time of the sale, the municipality taxes must be paid (half of the increase in value).

In an agreement for the sale of an apartment, it is customary to agree that the seller will pay debts with municipality taxes that were formed as a result of plans approved before the signing of the agreement, and in this way it is possible to ensure that the buyer purchases an apartment in its correct planning condition at the time of signing (with or without building rights, additions, etc.) and free of past debts. This certainty existed for many years and shaped the commercial life of the real estate market in Israel.     

In the last decade, the certainty of the customary arrangement between sellers and buyers in sales transactions began to be undermined, following a phenomenon called "conditional rights"Conditional rights refers to additional rights (increase in construction areas, floors, etc.) that are given to the property owner when certain conditions stipulated in the plan are met. If the conditions are not met, then the property owner does not receive additional rights and then no municipality tax is formed. On the other hand, when the conditions are met and given rights so there is already potential for tax.

An example of the phenomenon of conditional rights and the problems that arise - in a certain case, a provision was established in the plan that allows the building of a swimming pool in a residence, on the condition that the local committee that operates within the boundaries of the plan will allow the neighbors to raise objections to the construction of the pool and finally decide to approve the move despite the objections. In that case, the owner of the house entered into a deal with a buyer to sell the house, where as part of the deal the parties agreed that the owner of the house would pay the improvement levy for plans approved before the signing of the agreement - as is customary in the market. The property is sold. After some time, the buyer decided to exercise his right and issued a permit to build the swimming pool. At the time the permit was issued, the local committee issued a demand for payment of the improvement levy to the buyer. The buyer in response contacted the seller and in light of the agreement between them asked him to pay the improvement levy - Who should pay the debt? ?

According to the alleged agreement, the seller is supposed to pay a debt in municipality taxes that was established as a result of plans that were approved before the signing of the agreement. On the other hand, the buyer is the one who is going to enjoy the swimming pool, so why won't he pay municipality tax? There are many more ways to look at the situation, but what can already be understood is that there is a high potential for conflict between the seller and the buyer, and in addition, something with relative certainty in the matter is cracked.

One of the main rulings that tried to deal with the phenomenon is Alik Ron case[1] who determined in a similar case a collection model for the municipality taxes in two stages: The first step, at the time of the sale, when the approval of the plan created a partial liability in the improvement levy for the planning potential (for example, the potential to build a swimming pool that increases the value of the house). The second stage It is the excising of the potential when the building permit is issued by the buyer at the actual approval of the rights. When a partial tax can be collected for each of the stages.

Late rulings for the Ron ruling illustrate that the issue has not yet been resolved and legislative solutions have not yet been found to deal with the phenomenon.

A model that illustrates the situation (customer from Ron case):

[1] רעא 3002/12 The local committee for planning and building Givatayim v. Alik Ron, [published in Nevo] (7/15/2014)

In the bottom line, the relative balance and certainty that existed for years in the real estate market regarding improvement municipality taxes as been violated, and today when planning to purchase a property it is not enough to determine that the seller is the one who will pay debts with municipality taxes, but one must check and understand if the property has hidden or unrealized potential. If you plan to sell It is important to check whether there are additional potential rights that may result in a future charge for municipality taxes. In both cases, it is recommended to consult with lawyers who are knowledgeable in the field.