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            Holding an Apartment in Trust to Collateralize a Loan (December 28th, 2005)

            1.Factual Background


            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 not registered.


            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of paying "C”’s remuneration by granting him an apartment in the Project but the agreement with respect thereto was revoked later on, due to the fact that "C”’s remuneration was to be paid out of the profits of the Project, and the Project did not yield any profits.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 Authorities.


            2.Issues


            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?


            3.Conclusions


            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.

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