A Transaction to Purchase Shares in a Company that Owns a Hotel – An action in a real estate association subject to purchase tax: Nitsba – Princess Hotel Case

September, 2023 / EKW


Is the purchase of a business, such as a hotel, an action that constitutes a tax event according to the Real Estate Taxation Law? In order to answer this question, it is necessary to examine whether the transaction constitutes an action in a real estate association. The significance of classifying the transaction as an action in a real estate association is in the imposition or non-imposition of purchase tax, hence the economic importance of such a classification and sometimes, the importance of making a decision as to whether there is feasibility in purchasing a real estate property (such as a hotel) or purchasing shares of the corporation that owns the property. This article will present a number of refinements to the issue of the decision of the Appeals Committee at Be’er Sheva District Court B: AC 29172-01-21 Nitsba Holdings 1995 Ltd. v. Be’er Sheva Real Estate Taxation Administration [Nitsba Case]

Factual Background

Nitsba Holdings purchased the shares of Laxan Israel Ltd., which owned the land on which the Princess Hotel was built in Eilat. The purchase transaction was signed in September 2015, at the time the hotel was managed by Isrotel and approximately 40 days before the end of the management agreement with Isrotel.

Among the questions raised in the appeal committee’s decision:

– Is the tangible assets other than the hotel itself (movable property) owned by Laxan sufficient to exclude it from the definition of a real estate association?

– The significance of the management agreement nearing its end and the renovation plans to the claim that at the time of the purchase there was a live business of a hotel?

– Does a hotel operating under a management agreement necessarily constitute an independent live business that is separate from the property rights of the hotel owners?

Legal Background

The Real Estate Taxation Law (Capital Gains and Purchase), 5723-1963 (hereinafter: The Law) imposes taxation on the sale and purchase of rights in real estate assets. In addition, the Law imposes taxation on actions taken in a real estate association (through buying its shares). In this article, we will focus the discussion on this type of tax event – an action in a real estate association[1].

What is an Action and what is a Real Estate Association

The Law defines an action in a real estate association as the granting of rights in an association, including the sale and purchase of shares either for consideration or without consideration, but excluding the case of allocation of shares. The significance of the exclusion of allocation is the non-imposition of capital gains tax or purchase tax on the transaction.

The rationale underlying the exclusion of allocation is that the value of the holdings of the original shareholders (despite the dilution) has not changed, since the assumption is that a person will not give up his rights without compensation. The Rothschild Mall case [Gazit Globe case][2], examined an allocation of shares carried out by the company that owned the mall to another company, which transferred 99.9% of all rights in the company to the latter company. It was determined that such dilution constitutes an extreme allocation that does not meet the exclusion permitted by law, therefore, even though it is an allocation of shares, the existing exclusion in the Law will not apply.

The basic definition of a real estate association is defined by law as an association whose assets, directly and indirectly, are all rights in real estate. For this matter, cash, shares, bonds, securities and movables that are not used by the association to generate income, or that are used to generate income, but are secondary to its main purposes (hereinafter: Neutral Assets) will not be considered the association’s assets.

Thus, in order to determine whether an association is a real estate association, one must first locate the association’s assets, then classify the assets found and distinguish between them.

Secondary Discussion – Selling/Purchasing  a Hotel – Is this an Action in a Real Estate Association?

The main asset of a hotel company is the hotel building itself. However, the furniture, equipment and facilities in the hotel are central to the hotel’s income generation process, since the assumption is that guests would not rent rooms if it were not for the furniture and facilities.

It should be noted that often, a company that owns a hotel leases the hotel to external parties and/or enters into management agreements for the hotel, where it is determined which assets (facilities, furniture and equipment) belong to the company and which belong to those external parties (lessee / management company).

Decision 38/07 of the Tax Authority examined a transaction of the sale of shares of a company that owns a hotel, which constituted 75% of its assets. The hotel was leased to an external party and the lease agreement stipulated, inter alia, that the investments for improvements and renewal of the hotel’s equipment and facilities would be at the expense of the lessor during the lease period. In addition, it was determined that at the end of the lease period all additions and facilities in the hotel, even if they were installed by the lessee and at his expense, will belong to the lessor.

The Taxation Committee determined that the assets – fixtures, furniture and equipment – are used to generate the current income of the hotel and are not secondary to its main purposes and that these assets, in accordance with the lease agreement, belong to the company and not the lessee. Therefore, the Taxation Committee decided that the company should be excluded from the scope of a real estate association.

Can the determinations in taxation decision 38/07 also be met in the case of a hotel that is under construction? In such a situation, the association’s main (exclusive even) asset is real estate on which a hotel is to be built. For the most part, an association such as this does not own, at the time of the tax event, furniture and equipment that it uses to generate its income, and even if it already owns them, they are not used to generate its income at the time of the tax event. Hence, a hotel under construction may be considered a real estate association with a high probability.

Nitsba Case

From here we will return to the specific issues examined in the Nitsba case.

Movable Property in The Princess Hotel

Nitsba presented the movable property owned by Laxan as independent assets that should exclude Laxan from the definition of a real estate association.

In this matter, the value of the movable property in Laxan’s books for the 2014 tax year was approximately ILS 5m [balance for depreciation], while in the 2015 tax year this balance was fully depreciated.

The Appeals Committee referred to the accounting value of all the hotel equipment in the hotel and determined that it had a negligible value compared to the value of the entire hotel [approximately ILS 285m] and therefore constitutes a secondary asset and not an independent asset.

An active hotel is not always a live business

In this context, it is not disputed that at the time of the execution of the first share purchase transaction there was indeed an active hotel – the Princess Hotel.

But the Appeals Committee determined that this was not sufficient to prove it was a live business that is an independent asset of Laxan and determined that the overall context of the matter should be considered:

– In practice, the hotel’s business was in its closing stages, and certainly not a hotel with significant activity.

– No steps were taken to maintain the activity of the live business after the date when Isrotel was expected to discontinue management of the hotel, as Laxan’s plan was to close the hotel in order to carry out a comprehensive renovation for its operation.

– Laxan did not contract with additional employees / suppliers in order to continue operating the hotel.

The conclusion of the Appeals Committee was that the totality of the circumstances indicate that it is no longer possible to define the hotel business as a live business.

A managed hotel – not always a Live Business

Another of Nitsba’s claims was that the mere existence of a business as a hotel which is managed for it constitutes an independent live business, i.e., an additional asset to the right in the real estate, which affects the classification of the company and apparently leads to the conclusion that the company is not a real estate association.

In this matter too, the Appeals Committee determined that the essence of the matter must be examined and that the title of a management agreement is not enough to classify it as such.

“Although the title of the Isrotel agreement is Management Agreement, a review of the terms of the agreement reveals that the contract is essentially similar to a lease agreement. In the third ‘Whereas’, it is stated that Laxan may ‘provide the hotel… to Isrotel in order for Isrotel to manage it as a hotel…’; In the final ‘Whereas’, the parties agreed that the provisions of the Tenant Protection Law [combined version], 5732-1972, or any other law creating a protected tenancy, will not apply to Isrotel’s rights in the hotel. Laxan’s income is thus essentially similar to income from rental fees”.

After the Appeals Committee came to the conclusion that in fact the management agreement is nothing more than a rental agreement disguised as a management agreement and that the income is rental income only, then it also concluded that there is no independent live business here that excludes the classification of the company from the classification of a real estate association.


The Nitsba Case raises a number of emphases in relation to examining a deal to purchase shares of a company that owns a real estate property of a hotel:

1. Hotel equipment owned by the company will not constitute an independent asset as long as the accounting value of the equipment is low and marginal in relation to the entire purchase transaction.

2. Not every active hotel will be a live business and the entire background must be examined and especially in a case where a comprehensive renovation is planned in the near future which will lead to the hotel’s closure and in this case there must be a contractual reference in advance to ensure continuity of the business’ activity, and accompanying commercial activity that indicates this.

3. Not every agreement bearing the title of a management agreement will be classified as a management agreement that consolidates an independent live business for the owners of the managed property. An agreement that is nothing more than a rental agreement in the guise of a management agreement will be examined on its own merits, therefore, even in this context, the specific contractual provisions are significant.

[1] The Real Estate Taxation Law in its original form from 1949 imposed taxation only in the case of the sale and purchase of rights in real estate, which encouraged taxpayers to carry out operations in real estate in an indirect way by purchasing or allocating shares in a limited company that owns real estate (for example block/plot companies) and thereby avoiding paying real estate taxes. In order to prevent this loophole in the law, the Real Estate Taxation Law was amended in 1963 and stated that real estate taxation will also apply in the case of an action in a real estate association.

[2] CC 74/15 Rehovot Real Estate Taxation Administration et al. v. Gazit Globe Israel (Development) Ltd. et al. [published in Nevo] (dated December 14, 2017) (hereinafter – Gazit Globe Case) (A request for an additional hearing in ACC 1032/18 [published in Nevo] was rejected on September 18, 2018).


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