"89. [...]
(c) Profits from the sale of an asset that may be taxable, both according to Chapter One of Part B and under this Part or Part E, shall be deemed to be taxable under Chapter One of Part B only [...]. "
As determined in case law, this provision is based on the difficulty that sometimes arises in a clear distinction between fruitful income and capital income. This provision provides a solution to the difficulty stated in the form of
A "tie-breaker" mechanism (as Justice Y. Amit called it in the Barnea case, paragraphs 22 and 27 of his judgment), according to which when the profit can be classified as both capital income and fruitful income, and the scales are hostile, the fruitful classification - "fruity and capital - fruitful is preferable" (in the words of Justice Y. Amit ibid.). In other words, even if the receipts due to non-competition can be viewed as capital receipts, it is not enough to rule out that it is a fruitful income, since if it is an income with mixed characteristics, the fruitful classification prevails (Barnea case, paragraphs 22,27,62, and 66 of the judgment of Justice Y. Amit; and see also: Civil Appeal 5369/18 Katz v. Petah Tikva Tax Assessor, paragraphs 32-33 of the judgment of Justice E. Stein (June 27,2021), hereinafter: the Katz case).
- As I noted briefly above, in the wake of the Barnea case, another judgment was given that is relevant to our matter - the judgment in the Gangina case. In this judgment, the court discussed the application of the rules set forth in the Barnea case to payments in respect of a non-compete agreement not within the framework of an employee-employer relationship, but in circumstances similar to our case: in that case, the taxpayers were the owners and managers of a company that sold all of its business activity to a third party. Simultaneously with the sale agreement, the taxpayers and the third party entered into a non-compete agreement and received receipts from the third party in respect of this.
Apart from the determination (which I discussed above) that there is application to the two-stage test established in the case Barnea Even when it is not an employee-employer relationship, the court addressed the Gangina To the applicability of "Holding 'Holding'" (that the receipt is fruitful) in circumstances in which the payment was made outside the framework of the employee-employer relationship. In the matter Gangina, the court ruled that in circumstances in which the payment for the undertaking to avoid competition was not paid within the framework of the employee-employer relationship, the"Presumption 'possession'" which was determined in the matter Barnea.