Obligating the owners of control of the municipal property tax

April 13, 2011

As representatives of quite a few local authorities, we encounter quite a bit of the distress of the local authority, when companies' businesses open and close like mushrooms after rain, leaving large debts to the authorities. As will be explained below, the legislator now allows a local authority to sometimes charge a shareholder with the company's property tax, but "lifting the corporate screen" for this purpose is possible only in exceptional cases defined by law. After a client of our firm recently received a personal payment request to pay the debt of a company in which he holds shares, we found it appropriate to clarify the rights of the local authority in this context.
Due to the distress of the local authorities, in 2004 an amendment was passed to legislation enabling the collection of a final municipal tax debt from a private company from a controlling shareholder of the Company in respect of an asset that is not used for residential purposes under special circumstances. The Authority's right is formulated only when the following alternatives exist: The Company disbanded or ceased operations without paying a duty (as distinguished from an active company that has the means to remove the debt); The Company transferred its assets for no consideration or for a partial consideration and without any means remaining in Israel to settle the debt; Or the Company is liable for a final tax debt that transferred its operations to a group of persons who are the same controlling shareholders or their relatives in the Company.
The law also does not allow the Authority to collect the debts of the Company from any shareholder, but only from a controlling shareholder in the Company, where a controlling shareholder is defined as someone who alone or together with his relative holds at least twenty-five percent of the rights in the Company. The requirement of the law is that the controlling shareholder will have effective control over the conduct of the company and hence a personal liability arises in the payment of the company's property tax debt.
It is important to note that beyond meeting the existing alternatives in the law, there are additional threshold conditions before an administrative collection procedure is taken against the controlling shareholder. For example, it is important to ask when the debt was created, since if the debt was created before January 1, 2004, there is no application to amend the law. Moreover, local authorities wishing to take administrative collection procedures are obligated to include evidence, such as a debt demand from the company that was not granted, for which the lifting of the scope of incorporation is justified.
Moreover, in the court's ruling it is possible to distinguish between the charge of "general property tax" and the charges of water, sewage and security, since only a final charge in the "general property tax", with sufficient warning, enables the process of administrative collection against controlling shareholders in the company.
In light of the aforesaid, in the event that a shareholder of the Company receives a warning letter from a local authority, and certainly administrative collection procedures have been instituted against a shareholder, it is important to consult lawyers specializing in the field at the beginning of the proceeding.