Your Taxes: Is a hotel a real estate play in Israel?

A recent Israeli Supreme Court ruling on the Nitsba case has raised questions about whether a hotel company is considered a real estate entity for tax purposes. Purchases of Israeli real estate and shares in real estate entities are subject to purchase tax and VAT. However, the Israeli Supreme Court recently ruled that a company owning a hotel in Eilat, a popular coastal resort, is a real estate entity and therefore liable to purchase tax.

The case involved Nitsba Holdings, which purchased shares in Lexan for NIS 285 million in 2015. Lexan owned the Princess Hotel in Eilat, which was in poor condition and closed for extensive renovations. The hotel was supposed to reopen in 2020, but was destroyed by fire in 2019 and had not reopened by the time the case was heard in 2026.

The Israeli Tax Authority assessed purchase tax of NIS 17 million against Lexan because it appeared to be a real estate entity. Lexan argued that it was not a real estate entity under Israel Tax Ruling 38/07, as its business was not merely the ownership of movable property, and the hotel was expected to be closed for renovations. The Supreme Court disagreed, noting that a similar property flip case involving the taxpayer suggested a similar conclusion.

The court held that because all of Lexan's assets were real estate, it was subject to purchase tax. The ruling emphasized that an asset test applies, and the purchase tax is due if all the company's assets are real estate. The court also noted that many hotel operations in the US and other countries operate on an "asset-light business model," where the property owner and manager are separate entities.

The court concluded that management fees are generally passive rental income if the property owner receives a revenue share or a fixed minimum fee, rather than profit.