Although this may be the situation in our case (since, as stated above, I am of the opinion that the non-compete agreement is authentic and on the other hand, the appellants have not been able to establish the economic logic underlying the manner in which the consideration was split), I would like to leave this question for the time being. This is in view of my determination below regarding the classification of the receipt that Kahane received in respect of the non-compete agreement, which obviates the need to decide this question.
- Should the receipt received by Kahane in respect of the non-compete agreement be classified as capital or fruitful receipt?
- As noted above, a determination that the non-compete agreement is authentic does not constitute the end of the story, and we must move on to the second stage of the two-stage examination - the classification of the receipt received in respect of the non-compete agreement as capital income or as fruit income.
Before I examine the receipt in our case, I will expand a little on the normative framework outlined in the case law regarding the examination of this question.
- First, as was held in the Barnea case, when we are dealing with payments made to an employee by the employer, there is a "presumption", although it is still contradictory that a receipt that an employee received from his employer, including receipt for non-competition, is fruit income in accordance with section 2(2) of the Income Tax Ordinance. It was further held that the burden of contradicting this "presumption" is on the taxpayer-employee (Barnea, paragraphs 26-27 of the judgment of Justice Amit, which was joined in this matter by President M. Naor, Justice A. Vogelman, and Justice D. Barak-Erez).
It should be noted that Moving on to the judgment on the matter Barnea, different opinions were expressed on this issue (as reflected in the dispute between Vice President M Enlightened, The Judge A. Animals And the Judge P Fogelman II-Civil Appeal 2640/11 Haifa Tax Assessor v' Nissim (2.2.2014), hereinafter: עניין Nissim). Due to the lack of clarity on the issue, it was determined that the Barnea will be heard before an expanded panel (see: Matter Barnea, paragraph 1 of the President's opinion M. Naor). The Judgment in the Matter Barnea Adopted the judge's position A. Fogelman In the matter Nissim.
- Second, in the Barnea case, it was held that, on the merits of the matter, in the framework of examining the classification of the (authentic) receipt in respect of non-competition as "fruitful" or "capital", the receipt must be examined in accordance with the "loophole" that it came to fill, and it should be taxed in accordance with the law of that "loophole": in relation to this, it was held that as a rule, the "loophole" The receipt due to the non-competition clause to be fulfilled is the missing wage that the employee will not be entitled to in view of his undertaking not to compete, and therefore the receipt must be taxed in accordance with the law of wages - as fruit income in accordance with section 2(2) of the Income Tax Ordinance (Barnea case, paragraphs 44-45 of the judgment of Justice Amit).
At the same time, the court discussed the matter Barnea On another angle for examining the classification of the receipt - משל "The tree and the fruit". As I mentioned above, in accordance with the example "The tree and the fruit" The classification of capital or fruitful income is examined by the question of whether the income derives from the use of the factors of production, i.e., - picking the fruit of the tree; or the income derives from the sale of the factors of production, i.e. - Cutting down the tree. With regard to the non-compete clause, it was held that "The tree" is the worker's human capital, which gives him the ability to earn a living, while "The Fruits" are the wages and benefits that he derives from his human capital. In this context, this court held in the matter Barnea, that a receipt due to a non-compete clause constitutes, as a rule, compensation for the decrease in the income of the worker who cannot fully exhaust his earning capacity in light of the non-competition agreement. In other words, as a rule, this is not a matter of cutting down the tree, but rather of partial temporary pruning of one of the branches of the tree in a manner that does not negate the possibility of growing fruit in the future. Therefore, it was determined that as a rule, this is a return on the worker's human capital and this receipt should be classified as fruitful income (Name, paragraph 48 To the judge's judgment J' Associate).
- At the same time, in the Barnea case, Justice Amit left a narrow opening according to which there may be circumstances in which receipts due to non-competition will nevertheless be classified as capital income:
"Notwithstanding this, it is possible to ponder whether there may be circumstances in which non-compete payments of this type will nevertheless take a form similar to a capital transaction. Thus, for example, if we were dealing with a sweeping and indefinite non-compete stipulation in time, it could be argued that this is equivalent to a situation in which the employee sold his human capital. This example is, of course, hypothetical, since naturally, stipulations of this kind are not common in our districts, and it is doubtful whether they are even customary and whether they will be given legal validity, inter alia, in view of the severe infringement of the employee's rights inherent in them (ibid., paragraph 49 of the judgment of Justice Y. Amit, and see also paragraphs 29-30 of his judgment).