Background and purpose of the amendment
The primary purpose of the Sale Law (Apartments) (Assurance of Investments of Apartments Purchasers) (the “Act“) is to secure the consideration paid by purchasers by granting them various securities. The Act enumerates five types of securities that the seller can give to the purchasers to secure their money, with two of the aforementioned securities being the granting of an insurance policy and the provision of a bank guarantee to the purchasers in respect of the consideration paid to the seller.
Under the provisions of the existing Act, such securities are supposed to protect all monies paid by the purchasers. Thus, since the price of the apartment includes a component of VAT, it emerges that the volume of the security given to the purchaser also includes the VAT component.
Since the seller, the guarantor, is usually a real estate company (entrepreneur / contractor), the VAT component is transferred to the tax authorities on a regular basis, but on the other hand the seller gives the purchaser a bank guarantee for the entire amount including the VAT component. An ostensible financial burden, from the point of view of the security provider, is due to the high commissions it must pay in respect of the production of the bank guarantee or the insurance policy, as the case may be.
In order to reduce the burden on the security provider, Amendment No. 9 to the Act, published on March 30, 2017, provides that the amount of security given to the purchasers will be all the consideration paid by the buyer to the seller, with the exception of the VAT component.
The effect of Amendment 9 to the Act is that the scope of the security, such as a bank guarantee that will be given to the purchasers, will be the full amount of the consideration paid by the purchaser less the VAT component. Allegedly the VAT component paid by the purchaser is not protected by the security provided by the seller.
In order to ensure the VAT component in terms of purchasers in the event of cancellation of the transaction and realization of collateral, it was determined that a government fund would be established to ensure the refund of the money paid by the purchaser in the amount of the VAT component. Thus, the return of the VAT component to the purchaser rests with the state, which should provide purchaser with full protection of all the money they paid the seller, including for the VAT component.
We believe that the mechanism set out in Amendment No. 9 to the Act, according to which the volume of security given to purchasers by the seller will not include the VAT component, but the VAT component will be protected by a designated government fund that will ensure the VAT component is a welcome step For all parties.