Holding an Apartment in Trust to Collateralize a Loan (December 28th, 2005)
1.1In 2001 a financing agreement was entered into between "A”
corporation ("Lender”) and "B” Corporation ("Borrower”) in
accordance with which Lender undertook to make funds available to Borrower for
the construction of a building project ("Project”) by Lender.
1.2Borrower undertook to mortgage all its rights in the land
in favor of Lender as well as its own shares. A proper notice was executed but
1.3Borrower entered into a contract with Mr. "C”
pursuant to which "C” was appointed as the Project’s manager. "C”’s
remuneration was guaranteed by the Lender ("Guarantee”).
1.4At one point Lender was desirous of paying "C”’s
remuneration by granting him an apartment in the Project but the agreement with
respect thereto was revoked later on, due to the fact that "C”’s
remuneration was to be paid out of the profits of the Project, and the Project
did not yield any profits.
1.5Upon completion of the Project the Borrower did not repay
the Loan. One of the apartments in the Project was registered in "C”’s
name in trust for the Lender. The trust resulted from an agreement between "C”
and the Lender and was subsequent thereto reduced into writing. "C” paid
the purchase tax and requested the Lender to refund it. Upon registration of
the apartment in "C”’s name no notice was filed with the Tax
2.1Is the holding by "C” of the apartment in trust
for the Lender valid?
2.2Will the transfer of the apartment to the Lender from "C” incur a tax liability?
The law governing trusts recognizes
trusts created verbally. As for the Land Taxation, Law, 1963, it deals with
substance rather than form. Therefore the fact that the notice of the existence
of a trust was not filed in due time should not be a bar to the application of
the exemption from land appreciation tax upon transferring the apartment from
the trustee to the beneficial owner, as long as the trust did indeed come into
existence as a result of the agreement.