Sources inform ''Globes'' that a unit of Africa-Israel Investments Ltd. (TASE:AFIL), controlled by chairman Lev Leviev, saved NIS 200 million in taxes on the sale of Tel Aviv's Ramat Aviv Mall to Melisron Ltd. (TASE: MLSR), controlled by Leora Ofer through Ofer Investments Ltd..
Israel Tax Authority director general Moshe Asher told the Knesset Finance Committee on Tuesday that Africa-Israel exploited a "tax loophole" to avoid paying capital gains tax on the sale. "The government loses billions of shekels from tax planning on capital gains from valuations," he said, adding, "On just one deal, we lost NIS 200 million, which the State of Israel lost illegally."
Asher declined to disclose the details of the deal, due to confidentiality rules imposed on the Tax Authority, but sources said that the deal was the sale of the Ramat Aviv Mall by Africa-Israel subsidiary Africa-Israel Properties Ltd. (TASE: AFPR) to Melisron, as part of the sale of two malls at a value of NIS 1.74 billion in April 2009. Africa-Israel Properties sold its 73.4% stake in the Ramat Aviv Mall at a value of NIS 1.5 billion, and sold the Savionim Mall in Yehud for NIS 200 million. Migdal Insurance and Financial Holdings Ltd. (TASE: MGDL) did not sell its 26.6% stake in the Ramat Aviv Mall.
Then Africa-Israel CEO Izzy Cohen said at the time that the company's net cash flow from the sale was NIS 800 million. Leviev saved his companies a huge sum through legitimate tax planning, or, if you prefer, a tax loophole, which the Tax Authority is now trying to close through the 2013-14 Economic Arrangements bill.
By law, Israeli companies can revalue assets, such as real estate for investment, upwards. The revaluation raises the value of the assets in the company's balance sheets, and increases the company's profits, even though the property has not been sold. This loophole allows companies to use the paper profits to take bank loans and distribute them as dividends, without paying the companies tax on the upward revaluation. Africa-Israel exploited this loophole.
Several years ago, a Tax Authority team concluded that the distribution of profits from an upward revaluation should not be considered as a tax-exempt dividend. But the conclusion was never anchored in law, and the dispute over the issue has not been solved. Taxpayers and companies believe that this is legitimate tax planning and a proper interpretation of the law, and the Tax Authority has struggled to levy sanctions against the companies so long as they interpreted the law legitimately.
Before selling the Ramat Aviv Mall, Africa-Israel Properties distributed as a dividend the capital gain from the upward revaluation on the property. As soon as it was clear that the mall would be sold, special tax planning was made for it, including an upward revaluation to a high value. The company distributed a dividend on the basis of the revaluation, which lowered the value of the mall for the purpose of the sale. In the sale, Africa-Israel Properties and Melisron set a purchase price, which was basically a new, downward revaluation on the property. As a result of the dividend, which lowered the value of the mall, Melisron paid less for it. The seller, Africa-Israel Properties, saved a huge tax payment.
Migdal, which did not sell its stake in the mall, also benefited from the distribution of the dividend which formed the basis for a tax savings.
The Economic Arrangements bill includes an amendment to the law to close this loophole. The amendment states that the moment a company distributes dividends following a revaluation of a property, it will pay the companies tax on them. In other words, the revaluation will be considered as a sale of the property for tax purposes.
A source at Africa-Israel said today, "When Africa-Israel Properties owned the Ramat Aviv Mall, dividends were distributed to shareholders over the years, some of which were derived from valuations. Our position is, and has always been, that these dividends are tax exempt."
Published by Globes [online], Israel business news - www.globes-online.com - on July 3, 2013
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