Israeli court backs taxman on yachts

Herzliya Marina Photo: Tamar Matsafi

Owners of yachts imported to Israel must pay the wealth tax initiated by MK Yair Lapid (Yesh Atid), the Central District Court recently ruled.

Owners of yachts imported to Israel must pay the wealth tax initiated by MK Yair Lapid (Yesh Atid), the Central District Court recently ruled. The court dismissed a petition for a class action lawsuit against the Israel Tax Authority demanding restitution of purchase tax and VAT paid on imports of private yachts anchoring in Israel's marinas.

The court ruled that no purchase tax had been charged on yachts before August 2013, and that yacht owners were not obligated to pay purchase tax on yachts before that date. After that date, however, Lapid's order instituting purchase tax on yachts applies to a yacht upon entering the Herzliya Marina for the first time after August 12, 2013.

Despite the unequivocal ruling that purchase tax and VAT on private yachts is justified, the court ruling also imposed a limit for the first time on the period in which the Tax Authority could require yacht owners to pay the wealth tax.

The party filing the petition argued that the Tax Authority had collected taxes illegally, including Lapid's wealth tax. "Globes" revealed in 2017 that Lapid's wealth tax applied to Israeli yacht owners. From the beginning of 2017, most yacht owners began receiving demands for payment of purchase tax, even when the yachts had been purchased 10-15 years previously. The demands were based on the law that took effect for four years, starting in August 2013, imposing taxes on luxury items, including all-terrain vehicles, off-road vehicles, furs, antique furniture, yachts, jet skis, airplanes, etc. 15% purchase tax was imposed on imports of yachts and private airplanes.

Until early 2017, however, most owners of yachts more than five years old were not required to pay the tax. The situation changed when the period of the wealth tax was about to expire; the yacht owners began to receive demands to pay the tax upon entering Israel. The wealth tax was extended, and applies to this day.

The court's recent ruling settled one of the disputed points: when a private yacht is regarded as having been imported into Israel and the time framework in which owners of private yachts can be taxed.

The party filing the request for a class action suit is a Finnish citizen, married to an Israeli, whose center of life is in Finland. He owns a yacht anchored in the Herzliya Marina since 2010. After he received a detaining certificate from a tax officer, he paid in March 2017 the tax demanded of him for importing the vessel into Israel.

The Finnish citizen later petitioned the court for permission to file a class action against the Tax Authority. He claimed that he had been illegally charged NIS 44,202 in purchase tax and NIS 57,610 in VAT. The petitioner argued that the purchase tax imposed on the vessel in the August order was based on no specific legislative intent, and was therefore illegal. Alternatively, it was argued that the vessel was a tax-exempt item, or that a zero tax rate applied to it.

The petition also argued that insofar as an item imported to Israel was involved, the period before the statute of limitations applied began when the vessel first entered Israel, and the announcement of the tax issued to the party seeking a class action had therefore been issued after the legal period for indirect taxes (excess or inadequate tax paid).

Fiscal purposes

Central District Court taxation Judge Avigdor Dorot did not accept the yacht owner's arguments. Among other things, he ruled that the order imposing the wealth tax resulted from a declared policy by the Ministry of Finance imposing tax on luxury items, and that "The courts exercise significant restraint in considering the legality of secondary legislation bearing parliamentary approval, especially in economic questions."

The judge also dismissed the yacht owner's argument that his vessel had been anchored in the Herzliya Marina since 2010 and had been suddenly detained by a customs duties officer, and that the statute of limitations consequently applied to the demand. The judge ruled that the tax became effective on August 12, 2018, and that the period of time elapsed between the order becoming effective and the demand for payment was therefore two years, eight months, and 18 days. "The statute of limitations arguments are therefore groundless," the judge ruled.

Judge Dorot noted that the period before the statute of limitations applied had been set at five years from the date on which the inadequate taxation of an imported item took place, and three years for other items. "In this matter, the item is imported, so the determining period is five years," the judge ruled.

In this context, the party requesting permission for a class action tried to argue that his yacht was not an item (product). "Vessels never arrived on a ship," he argued, but Judge Dorot dismissed this argument, ruling, "There is no substance in it," and that bringing a yacht to Israel, even if it did not arrive in a container on a ship or other goods, was considered importing.

The statute of limitations question

Although the ruling appears to be detrimental to owners of private yachts, some of whom have been involved in tax disputes and negotiations with the tax authorities in the past two years, some believe that the judgment could even help some of them end their disputes without paying the wealth tax.

Tax expert Adv. Rani Schwarz, a partner in the Yaron-Eldar, Paller, Schwarz & Co. law firm, says that the court settled matters for owners of "old" yachts, who did not know whether the statute of limitations applied to their tax liability. He says, "In its ruling, the court set the period before the statute of limitations applied at the five-year period stipulated in the Indirect Taxes Law, from when the wealth tax went into effect in August 2013 until the date on which the demand for tax is presented."

Schwarz added, "According to the ruling, when a boat that entered Israel before August 2013 is involved, the Tax Authority is enjoined after August 2018 from demanding purchase tax on the boat, because the period before the statute of limitations applies has expired."

Published by Globes, Israel business news - en.globes.co.il - on February 27, 2019

© Copyright of Globes Publisher Itonut (1983) Ltd. 2019

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Herzliya Marina Photo: Tamar Matsafi
Herzliya Marina Photo: Tamar Matsafi
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