The appellants submitted an objection to these assessments to the respondent. At the end of the objection proceeding, on December 16,2019, the respondent's notice was given regarding the details of the reasons for determining the orders according to Section 158A(II) To the Ordinance Income Tax. In this context, the respondent rejected the appellants' objections, and explained why he did not receive their reports and ruled that the receipt that Kahane received from the acquiring company should be reclassified. The appellants filed three appeals to the District Court, which were heard jointly.
- To complete the picture, it should be noted that during 2019, Kahane sold his shares in Eisenberg for a total estimated at ILS 8 million (which Kahane estimates may be even higher).
The District Court's Judgment
- On June 29,2022, the District Court (Judge Seroussi) issued a judgment, which rejected the tax appeals filed by the appellants.
The trial court noted that in the judgment inCivil Appeal 5083/13 Assessor Kfar Saba v. Barnea (August 10,2016) (hereinafter: The Barnea Matter), it was held that the tax-deductible classification of payments received by an employee from his employer in exchange for a non-compete clause should be examined in two stages: first, it must be examined whether the payments were made in exchange for an authentic non-compete clause and not as a cover for other payments. Then, to the extent that he finds that the non-compete clause is authentic, it must be examined whether the payment is of a capital or fruitful nature. The District Court further noted that it was determined that there is a "Presumption 'Strong'", according to which payment for a non-compete clause is a fruitful payment as labor income (according to Section 2(2) 30Income Tax Ordinance).
Subsequently, the District Court noted that in our case we are not dealing with the payment given to the employee, by his employer, against a non-compete clause. Therefore, the court held that the presumption "Possession", which was determined in the case Barnea, there is no direct application to our case. However, the court added that Kahane was not only the owner of the Eisenberg company (through the holding company) but also its hired manager. Therefore, the court ruled that to the extent that the receipt given to Kahane reflects, at least in part, compensation for the termination of his employment during the period of non-competition, the said presumption may apply, since from a material point of view it is a payment intended to be in lieu of Kahane's salary. However, the District Court noted that in view of the result reached it is not required to rule on this question.
- Accordingly, the court first examined whether the matter before it was anauthentic non-compete clause - that is, whether the payment that Kahane received in the framework of the non-compete agreement did indeed reflect payment for a genuine non-compete clause or whether it was consideration for the sale of the Eisenberg company's activity, which was artificially split for reasons of tax savings. The court insisted that such an artificial split leads to tax savings, since the receipts that Kahane received, in accordance with the manner classified by him, are subject to the reduced tax rate on capital gains, under the payment of corporate tax on the full amount and the payment of dividend tax on the amount that Kahane received.
The District Court ruled that Hovering "A real question mark" Regarding the degree of authenticity of the non-compete clause in which Kahane entered, for several reasons.