Municipal Tax Debiting for Multi-Purpose Buildings

For the purpose of determining the rate of the municipal tax by the local authority, properties in general and multi-purpose building specifically are classified based on their type, their use and their location. The question of classifying a multi-purpose building under one type of property, or its splitting under several types according to the various uses of the areas therein has tremendous financial consequences for the property holder. Therefore, it is extremely important to examine the various classifications and amounts of municipal taxes for each option, in order to make an educated decision as to which option is more worthwhile and profitable to the property holder.

Background

The classification of a property for the purpose of paying municipal tax to the local authority is done in accordance with Article 8(a) of the Economics Arrangements Law[1], which states that the municipal tax shall be determined “based on an area unit, according to the type of the property, its use and its locations, and shall be paid by the property holder”. Generally, the classification of the property is done by examining the “core of activity”, namely what is the property’s main purpose.

However, this is the simpler case, in which all property areas are classified under the same title, whether for residence, employment, hotel, industry and such. The more complicated case, which holds a significant degree of interpretation, both by the municipal tax administration at the initial stage and by the courts at a later stage, regards multi-purpose buildings, where each part of the property can be classified differently according to its type, its use and its location.

The importance of  classifying multi-purpose buildings is obvious, whereas the total municipal tax debiting for different types of properties is different. For example: the maximal tax amount that could be collected in 2013 for a square meter of property classified as a hotel (both for the area of the rooms and for the remainder of the building’s built area) was 170.76 NIS. On the other hand, the maximal tax amount  that could be collected for a square meter of a property classified as an office was 219.43 NIS, and the maximal amount for parking lots was approximately 14.41 NIS[2]. Thus, the question whether a multi-purpose building is classified as one type of property, or rather split according to each separate facility, is a question with very high economic significances, which might reach hundreds of thousands of Shekels per year, if not more.

 The tests required in order to classify multi purpose buildings

In the past, the calculation of municipal tax for properties in general and multi-purpose buildings specifically, was determined by the nature and profitability of the business[3]. For example, bank branches were classified as “bank” regardless of the area in which they were located, and  that included warehouses accompanying the bank and serving it.

The approach described above, came to an end when the Supreme Court ruled that “the use of a certain property, even if it is part of a multi-purpose facility, is the determining factor”[4]. Namely, the use of a certain property determines its classification for the matter of calculating the height of the municipal tax, sometimes regardless of the fact that is is a multi-purpose building where the rest of its areas are used differently.

For the purpose of figuring out the use of a certain property, the courts have acknowledged two tests: (1) according to the first test, one should examine whether there’s an affinity between the purpose of one unit and the purpose of an adjacent unit. If such an affinity exists, then the “multi-purpose facility is regarded as a single property. However, in the absence of such affinity, each unit shall be classified separately according to its purpose. (2) According to the second  test,  one should examine whether the use of the specific part is essential to the nature of the main use of the property and to the realization  of its purpose[5].

The implementation of the aforementioned tests has led the courts to distinguish between different uses of certain parts within a multi-purpose building,so we can now learn of the possible ways to classify a multy purpose property. . For example, in one case, the District Court in Tel-Aviv has ruled that the classification of the management offices of a bank branch differs from the classification of the bank itself[6]. Namely, the municipal tax for the bank’s offices floor shall be debited differently from the municipal tax for the floors of the bank itself. This determination was based on the fact that the bank offices do not serve the same purpose as the bank itself (namely, providing services for its clients), but the purpose of the offices is managing the bank within itself. The economic significance of this separate classification was a reduction of hundreds of Shekels each year from the municipal tax debiting for each square meter, a significant reduction by all accounts.

The implementation of the tests regarding the question of a uniform classification or a separate classification of a multi-purpose building in the field of hoteliery

If we try to implement the tests set in the Ahuzat Rishonim Case above, we could see that an attempt to classify multi-purpose buildings differently, for example in the field of hoteliery, has the potential to bring a fundamental change in the height of the municipal tax they have to pay each year. For example, most hotels contain convention and event halls, which usually host external events rather than events for the hotel’s guests. Thus, it is possible to try and argue that the correct classification is “occupied land which serves for holding events” and not “hotel”. The reason for arguing such a thing, will be based on the tests set in the Ahuzat Rishonim Case, especially the second test which examines whether the use of the specific part (the convention halls in our case), is essential to the nature of the main use of the property and for the realization of its purpose. It is possible to claim with regards to this test, that holding events in the hotel’s convention halls, does not realize the hotel’s main purpose (hosting guests) and is not essential to its main purpose.

The claim brought in the example regarding the event and convention halls, can also rely on the Supreme Court ruling in the Ahuzat Rishonim Case mentioned above, where it was determined that the property classification is not a uniform classification and that “… there isn’t necessarily a purposeful affinity between the various units and the residential units that constitute the property’s main purpose”[7]. It is no doubt possible to rely on this ruling and to claim that despite the hotel’s main purpose as a place intended for hosting guests, in actuality there is no purposeful affinity between the convention and event halls and the hotel itself, therefore there is room to consider splitting the municipal tax for each part of the multi-purpose building. Needless to say, the economic significance of accepting the claim regarding the split classification in hotels is a significant reduction in the total municipal tax collectible for hotel areas.

Summary

As was clarified in detail in this article, the importance of the classification of a property for the purpose of debiting municipal tax is great and holds extremely high economic consequences for the property holder. It is important to remember that recognizing a property as a multi-purpose building and the tests set in the court rulings are very complex matters, and it is sometimes difficult to comprehend the coherency between them. Therefore, a holder of a multi-purpose building should examine the height and type of municipal tax he pays for the building, and at the same time remember that the issue of classifying a multi-purpose building, in a uniform way, according to the main use of the property, or in a split way according to the different uses of each area separately, is a complex issue which can hold several different interpretations.