Israeli yacht owners appeal inclusion in "wealth tax"

Herzliya Marina Photo: Tamar Matsafi

The yacht owners say their boats were purchased for business purposes, not private use.

A group of 15 yacht owners are submitting to the Israel Tax Authority an objection to being subjected to the "wealth tax" initiated by then-Minister of Finance and Yesh Atid Party leader MK Yair Lapid, sources inform "Globes." The tax amounts to NIS 60,000-100,000 per yacht. The yacht owners claim that their boats were purchased for commercial purposes of operating businesses in sailing and marine sports, not for private use, and that the "wealth tax" should therefore not apply to them.

Sources inform "Globes" that discussions are currently taking place between the Tax Authority and a number of the yacht owners submitting objections to their tax assessment. It was also learned that some of the yacht owners had reached tax settlements concerning the value of their yachts.

Commercial use

Three months ago, "Globes" revealed that Lapid's wealth tax was being applied to Israeli yacht owners. From the beginning of the year, most of the yacht owners began receiving demands for payment of purchase tax, even when the yachts were purchased 10 and 15 years earlier. The assessment is based on a law that took effect for four years starting in August 2014 imposing tax on luxury items, including quad bikes and field vehicles, furs, antique furniture, yachts, water scooters, airplanes, and other items. A 15% purchase tax was set for yachts and private airplanes imported to Israel. Until recently, however, the tax was not being assessed for most owners of old yachts who have owned them for over five years. Now that the four-year tax is about to expire on December 31, the yacht owners are being served to orders for payment of the tax upon returning to Israel. The new demand naturally resulted in a dispute between the Israeli yacht owners and the Tax Authority. As reported by "Globes" in July, the main dispute is whether or not the yacht was imported to Israel, and when it happened. It is now emerging, however, that there are other disputes between the Tax Authority and the yacht owners, with a new dispute involving the purpose for which the yacht was purchased and used - whether the use was business or private.

In the framework of the objections being filed to the assessments issued to yacht owners at Haifa and Ashdod Ports, among other places, the yacht owners are claiming that the "wealth tax" is meant to apply to yachts purchased for private use, not for commercial and business use. The yacht owners employ workers in sailing and business, among other things, and give sailing lessons at all levels, lease their boats, give courses in navigation, yacht sailing courses, and offer activities for yacht sailors and the general public, including cruises and deck parties. The wealth tax, they argue, is not meant for these business owners.

Among other things, these arguments are based on the lawmakers' rationale for imposing a tax on luxury items. In the discussions, a distinction was made between luxury assets designed for personal use and those designed for commercial uses. Among other things, a distinction was made between a private airplane, which was taxable, and tourist airplanes and those used to fly passengers, which were not taxed; refrigerators with a volume of over 800 liters for personal use and refrigerators of that size used for restaurants; quad bikes for personal use and quad bikes used in agriculture; and so on. For example, in the Knesset Finance Committee's discussions on the law, then-Tax Authority representative and current Ministry of Finance budget department director Eran Yaakov said, "We have no plans to touch cargo or passenger planes. At the same time, there is no reason why someone with a private plane should not be taxed."

Based on these distinctions, it is being argued, it was clear that the tax was designed to apply to luxury goods used by their owners for enjoyment and personal use, not to goods purchase for commercial use.

According to the owners of yachts used for their businesses, the legislator was aware of the damage that could be caused to business owners using "luxury goods" for commercial business, rather than their own personal enjoyment. They are claiming that when yachts are purchased for regular business activity, they are business inventory, not luxury goods at all. The yacht owners should therefore not be assessed for purchase tax. In the bottom line, the yacht owners are arguing that luxury goods purchased for business and commercial use are exempt from purchase tax.

Another argument raised in the tax dispute is that when the Tax Authority made its assessments, it ignored the date on which the yachts were purchased, and arbitrarily set the assessment for every yacht owned by the taxpayers with no distinction between them. In making wealth tax assessments, the Tax Authority has no specific policy on purchase tax on old yachts purchased before the tax was enacted. Many yacht owners say that purchase tax is being imposed retroactively on their yachts.

Owners of old yachts are also being charged fines, interest, and linkage differences for not paying the tax, despite the fact that the Tax Authority did not impose the tax in previous years. The yacht owners say that this enforcement is selective, retroactive, and unfair.

Former Israel Bar Association head Advocate Doron Barzilay and Advocate Israel Slavin of the Doron Barzilay & Co. law firm, who are representing a number of yacht owners, say, "It is obvious that owners of yachts classed as luxury assets that are used exclusively for commercial and professional purposes should be taxed accordingly. The state is dazzled by the fact that a luxury product is involved, while the result is discrimination against the business owners. There is no difference between this case and a Mercedes-Benz car used as a taxi. Instead of helping businesses, the state is depriving them of benefits and damaging them. Any tax result that is double taxation or applies an erroneous tax regime cannot stand and creates discrimination, and the objection in the matter should be accepted."

The Tax Authority said in response, "As a rule, there is no legal distinction between the various uses of yachts - meaning that according to the law, all imports of a vessel classed as a yacht is subject to luxury tax. Insofar as objections have been filed in the matter, they will be considered. As far as taxation of old yachts, a number of objections to the tax have been filed, and are also being considered at present.

Tax Authority stretching out octopus arms to yacht owners

The wealth tax expired in August, but was extended to the end of the year by administrative order. It is believed that the Knesset Finance Committee will hold discussions about extending the tax, and that a majority will support the extension of its current 20% rate, or will even increase the rate. At the same time, it is clear that the disputes that it is causing will continue for a long time. As reported by "Globes," the main dispute between the Tax authority and the yacht owners concerns the question of whether the Tax Authority can assess owners of old yachts for purchase tax. Note that yachts bearing a foreign flag (registered in a foreign country) can reside in Israel as a guest for three months, and are not charged any tax whatsoever in Israel. If the yacht resides in Israel beyond this period, however, it is considered an import to Israel. Yachts imported to Israel are taxed at 32%: 15% purchase tax and 17% VAT. Most of the yachts anchored in Israel are registered in the names of foreign companies, including yachts belonging to Israelis. The Tax Authority recently began enforcing the time limitation and sending tax assessments to owners of yachts anchored in Israel for prolonged periods.

According to the yacht owners, no one enforced the three-month time limit for many years. They say that they cannot be charged purchase tax for a yacht purchased many years ago, before the wealth tax law was enacted.

The Tax Authority, on the other hand, believes that some of the yacht owners have up until now managed to stay under the radar by registering their yachts in the name of a foreign company. The Tax Authority is therefore arguing that the yacht owners have nothing to complain about, because they tried to evade taxes.

How did the Tax Authority become aware of these "tax evaders"? Every entry of a yacht into Israel requires approval from the customs authorities. The Tax Authority recently began checking the approvals for yachts from Israel upon leaving Israel. Among other things, it turned out that some of the yachts had entered Israel a year previously, and that even if the yachts were registered in the name of a foreign company, the company itself was owned by Israelis, and that import taxes on the yachts should therefore be paid

The enforcement procedure, which includes a demand for approval by the Tax Authority every times a yacht enters or leaves Israel, was also the basis for the petition for approval of a class action submitted by the Blue Wave yachting club and a number of yacht owners through Advocate Vered Cohen against the Israel Administration of Shipping and Ports, the Tax Authority, and the Ministry of Economy and Industry. The petitioners demanded that the passive collection proceedings for VAT and purchase tax for small vessels be withdrawn. The court summarily dismissed the petition by some of the petitioners, because they did not meet the legal requirements for a class action. Some of the petitioner whose petition was dismissed renewed the proceedings through a petition to the High Court of Justice, based on the question of whether the Tax Authority was entitled to levy purchase tax on them, including on yachts purchased years before. Among other things, the petitioners are alleging the statute of limitations against the charges, and are asking the Court to instruct the state to set a regular enforcement policy, and to declare that the order imposing purchase tax on vessels and water scooters be declared null and void.

Published by Globes [online], Israel Business News - www.globes-online.com - on November 27, 2017

© Copyright of Globes Publisher Itonut (1983) Ltd. 2017

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