Israeli District Court Rules Taxpayers and Tax Authority Must Adhere to Assessment Agreements

An Israeli district court ruled that taxpayers cannot unilaterally change positions after signing assessment agreements with the Israel Tax Authority, and that the authority is similarly bound by such agreements. The ruling came in Weiss vs Large Enterprises Assessing Officer. The taxpayers were a husband and wife.

The wife owned eight commercial properties received by gift or inheritance, while the husband owned two residential apartments. The couple also held shares in a company that owned five additional properties. All properties were rented out.

The husband qualified as 100% disabled under Section 9(5) of the Income Tax Ordinance. This provision allows a larger exemption for active income, up to NIS 684,000, and a smaller exemption for passive income, up to NIS 81,960. The couple sought to apply the husband's full exemption against the wife's rental income by classifying it as active.

The Israel Tax Authority objected to this classification. It persuaded the couple to sign assessment agreements for the years 1995-2001 and 2011-2014. Those agreements stipulated that only 15% of the wife's rental income would be allocated to the husband as active rental income in those years and in subsequent years.

Six months after signing the second agreement, the couple filed a joint tax return for 2015 claiming the active-income exemption for 100% of the wife's rental income. The authority rejected this approach. The court determined that the rental income qualified as active business income.

It cited the number of properties involved, the required management efforts, and the specialized knowledge of the real-estate market. The court also found that joint tax returns are permitted under tax law and that the husband's disability exemption could in principle be applied against the wife's rental income in such a return.

Despite these findings, the court ruled that the couple was bound by the 2011-2014 assessment agreement.

That agreement explicitly stated it would continue to apply in later years. As a result, only 15% of the wife's rental income could be allocated to the husband for the years in question. The court stated that when the couple signed the assessment agreement for 2011-2014, which included an express obligation to apply it in subsequent years, they waived any other claims regarding the allocation percentage.

The decision applies specifically to assessment agreements reached after the relevant transactions have occurred. Separate rules govern advance tax rulings, which cannot be changed unilaterally unless circumstances change. Taxpayers and the Israel Tax Authority are both required to adhere to the terms of such agreements once signed.