Tax on corporate transactions in Israel: overview

A Q&A guide to tax on corporate transactions in Israel. This Q&A provides a high level overview of tax in Israel and looks at key practical issues including, for example, the main taxes, reliefs and structures used in share and asset sales, dividends, mergers, joint ventures, reorganisations, share buybacks, private equity deals and restructuring and insolvency.

To compare answers across multiple jurisdictions, visit the Tax on corporate transactions Country Q&A tool.

This Q&A is part of the PLC multi-jurisdictional guide to tax on transactions. For a full list of jurisdictional Q&As visit www.practicallaw.com/taxontransactions-mjg.

Leor Nouman and Moti Saban, S Horowitz & Co
Contents

Tax authorities

1. What are the main authorities responsible for enforcing taxes on corporate transactions in your jurisdiction?

The following main authorities are responsible for enforcing taxes on corporate transactions:

  • The Income Tax Authority.

  • The VAT Authority.

  • The Real-Estate Taxation Authority (with respect to real estate transactions).

 

Pre-completion clearances and guidance

2. Is it possible to apply for tax clearances or obtain guidance from the tax authorities before completing a corporate transaction?

It is possible to apply for tax clearances, or obtain a tax pre-ruling from the tax authorities, before completing a corporate transaction, provided that clarification from a legal perspective is required. As long as the recipient of the clearance or ruling complies with its terms, it is binding on both the taxpayer and the tax authority.

 

Main taxes on corporate transactions

Transfer taxes and notaries' fees

3. What are the main transfer taxes and/or notaries' fees potentially payable on corporate transactions?

Purchase tax

Key characteristics. Purchase tax is imposed on the importation or sale of certain types of goods, including motor vehicles, alcohol and cigarettes.

Triggering event. The import or the sale of the goods which are subject to purchase tax.

Liable party/parties. The purchaser of the goods that are subject to purchase tax is liable for the tax.

Applicable rate(s). The rates of purchase tax vary from one product to another. The range of Israeli purchase tax is very wide. While the importation/sale of certain types of goods is exempt from purchase tax, the importation/sale of other types of goods is subject to purchase tax at over 100%.

Acquisition tax on real estate rights

Key characteristics. Generally, on the purchase of real estate rights, the purchaser will be liable to pay acquisition tax, unless a specific exemption to this tax is applicable, has been requested and is subsequently obtained. Generally, the purchase of a sole residence with a value of no more than ILS1,350,000 is exempt from acquisition tax (as at 1 March 2012, US$1 was about ILS3.8).

Triggering event. The purchase of real estate rights triggers the tax.

Liable party/parties. The purchaser pays acquisition tax on real estate rights.

Applicable rate(s). Rates vary from 0% to 7% of the price paid for the real estate right.

 

Corporate and capital gains taxes

4. What are the main corporate and/or capital gains taxes potentially payable on corporate transactions?

Capital gains tax

Key characteristics. Broadly, the sale of a capital asset is subject to capital gains tax. An "asset" includes any property, whether movable or immovable, as well as contingent or vested rights in Israel or abroad, except for:

  • Movable property held by an individual for his personal use.

  • Inventory.

  • Rights in real estate.

  • Rights in real estate companies.

The term "sale" includes any direct or indirect exchange, renunciation, disposition, transfer, grant, gift and also any other act or occurrence as a consequence of which an asset passes out of the control of one person to another (excluding by way of inheritance). An Israeli tax resident is liable to tax on capital gains accrued or generated in Israel or abroad. On the other hand, a foreign tax resident is liable to tax on capital gains accrued or generated in Israel (unless an exemption is requested and subsequently obtained).

Triggering event. The sale of a capital asset triggers capital gains tax.

Liable party/parties. The seller of a capital asset is liable to pay the capital gains tax.

Applicable rate(s). A body of persons is liable to corporate tax on the real capital gain (which does not include the inflationary amount) at the ordinary corporate tax rate (25% in 2012).

Corporation income tax

Key characteristics. A corporate income tax is imposed in respect of business profits. An Israeli tax resident company is liable to tax on business income accrued or generated in Israel or abroad. A foreign tax resident company is liable to tax on income accrued or generated in Israel.

Triggering event. The production of business income triggers the tax.

Liable party/parties. The producer of the income is liable to pay the tax.

Applicable rate(s). The applicable rate is 25% of the business income generated.

Dividend income tax

Key characteristics. If dividends are distributed by an Israeli resident company to another Israeli resident company, no corporate tax will be payable on that distribution if the dividend distributed originated from income generated or accrued in Israel. However, income obtained by an Israeli resident company in the form of dividends originating from income generated or accrued outside of Israel (that is, dividends from an Israeli resident company whose profits are earned abroad and dividends distributed by a foreign company) is subject to corporate tax at the rate of 25%, though a tax credit may be obtained in respect of the foreign taxes paid abroad on that distributed dividend.

Triggering event. Distribution of dividends triggers the tax.

Liable party/parties. The recipient of the dividend is liable to pay the tax.

Applicable rate(s). Rates vary from 0% to 25% on the amount of the dividend distributed.

 

Value added and sales taxes

5. What are the main value added and/or sales taxes potentially payable on corporate transactions?

VAT

Key characteristics. VAT is an indirect tax based on the consumption of goods and services and usually the end-customer bears the payment of VAT. In general, VAT is imposed in respect of the following:

  • The sale of an asset (not including shares and tradeable securities).

  • The performance of a service, subject to one of the following conditions being met:

    • the transaction is made by an authorised dealer in the ordinary course of business (transaction);

    • the transaction entered into is an "occasional transaction", that is, a transaction involving an occasional sale of goods or an occasional performance of services and which is of a commercial nature only (or a transaction relating to a specific sale of real estate);

    • the transaction involves the importation of goods into Israel.

Therefore, shares and tradeable securities, as well as all rights attaching to them, are excluded from the definition of an "asset" and any sale of these is usually not subject to VAT.

Triggering event. The consumption of goods or services triggers the tax.

Liable party/parties. The purchaser of the goods or services is liable to pay the tax.

Applicable rate(s). VAT is charged at a rate of 16% of the purchase price paid.

Purchase tax

Key characteristics. Purchase tax is imposed on the importation or sale of certain types of goods, including:

  • Motor vehicles.

  • Alcohol.

  • Cigarettes.

Triggering event. The importation or sale of these goods triggers the tax.

Liable party/parties. The purchaser is liable to pay the tax.

Applicable rate(s). The rates of purchase tax vary from one product to another. The range of Israeli purchase tax rates is very wide. While the importation/sale of certain types of goods is exempt from purchase tax, the importation/sale of other types of goods is subject to purchase tax at a rate of over 100%.

 

Other taxes on corporate transactions

6. Are any other taxes potentially payable on corporate transactions?

Appreciation tax

Key characteristics. Capital gains accruing from the sale of rights in real estate in Israel or rights in an Israeli real estate company are subject to "appreciation tax".

Triggering event. The sale of rights in real estate or rights in an Israeli real estate company triggers the tax.

Liable party/parties. The seller is liable to pay the tax.

Applicable rate(s). A body of persons is liable to appreciation tax on the real appreciation (which does not include the inflationary amount) at the ordinary corporate income tax rate applicable (25% in 2012).

Betterment levy

Key characteristics. In the event that, as a result of modifications in the assignment or building rights in respect of certain land (that is, additional building rights or a change in the designation of the land), there is an increase in the value of the land, the owner of the land is liable to pay a betterment levy to the local or regional authority (council/municipality).

Triggering event. A sale of land or the receipt of a building permit in respect of the additional rights triggers the tax.

Liable party/parties. The owner of the land is liable to pay the betterment levy.

Applicable rate(s). The tax is charged at a rate of 50% on the real appreciation.

 

Taxes applicable to foreign companies

7. In what circumstances will the taxes identified in Questions 3 to 6 be applicable to foreign companies (in other words, what "presence" is required to give rise to tax liability)?

See Questions 3 to 6.

 

Dividends

8. Is there a requirement to withhold tax on dividends or other distributions?

Generally, dividends distributed to individuals are subject to withholding tax at a rate of 25% or 30% provided that the shareholder was, at the time he received the dividend or at any other time during the preceding 12 months, a "substantive shareholder" in the body of persons that paid the dividend (broadly, a substantive shareholder is a person who directly or indirectly, alone or together with a relative, holds at least 10% of one or more of the means of control in a body of persons).

Dividends paid by an Israeli resident company to another Israeli resident company are generally exempt from corporate tax, unless the dividend derives from income generated abroad by that Israeli company.

Dividends distributed by an Israeli resident company to foreign resident companies are subject to withholding tax at a rate of 25%, subject to the provisions of double taxation treaties in the relevant country.

 

Share acquisitions and disposals

Taxes potentially payable

9. What taxes are potentially payable on a share acquisition/share disposal?

Income generated from the sale of securities which is classified as business income is subject to corporate income tax and, if not so classified, will be subject to capital gains tax (see Question 4).

 

Exemptions and reliefs

10. Are any exemptions or reliefs available to the liable party?

Certain exemptions from capital gains tax from the sale of securities are applicable to foreign residents. A foreign resident is exempt from tax on capital gains from the sale of listed securities if the capital gain is not attributable to a permanent establishment (PE) in Israel. A foreign resident is also exempt from tax on capital gains from the sale of unlisted shares of an Israeli resident company, if the capital gain is not attributable to his PE in Israel and provided that the shares were not acquired from his "relative" (as that term is defined in the Income Tax Ordinance).

 

Tax advantages/disadvantages for the buyer

11. Please set out the tax advantages and disadvantages of a share acquisition for the buyer.

Advantages

Business losses can generally be set-off against business income and capital gains from future disposals of capital assets in the company.

Disadvantages

Among the liabilities of the acquired target company, the buyer may inherit undisclosed tax liabilities.

No capital allowance or depreciation is available on the purchase of shares.

 

Tax advantages/disadvantages for the seller

12. Please set out the tax advantages and disadvantages of a share disposal for the seller.

Advantages

The seller may be able to take advantage of the above mentioned capital gains exemptions and exemptions for foreign residents in reliance on double taxation treaties (see Question 10).

No VAT arises on the sale of shares.

Disadvantages

An asset disposal is taxable at both corporate and shareholder levels.

Generally, losses on disposals of shares cannot be set-off against future business income.

 

Transaction structures to minimise the tax burden

13. What transaction structures (if any) are commonly used to minimise the tax burden?

Israeli taxation legislation and, particularly, the Capital Investments Law, provides for various tax incentives applicable to both local and foreign investors, in the form of grants and tax reliefs. For example, a foreign investment company (largely, a company in which foreign residents are invested where the investors' rights to receive profits, vote for and on behalf of, and appoint officers in that company, exceed 25%) that qualifies to be included within the Approved Enterprise Course will be taxed at a lower rate of corporate tax, rather than the standard rate of corporate tax rate.

 

Asset acquisitions and disposals

Taxes potentially payable

14. What taxes are potentially payable on an asset acquisition/asset disposal?

Acquisition tax on real estate rights

Generally, on the purchase of real estate rights, the purchaser is liable to pay acquisition tax, unless a specific exemption from acquisition tax is requested by the purchaser and subsequently obtained (see Question 3).

Capital gains tax

Broadly, the sale of a capital "asset" (as defined in Question 4) is subject to capital gains tax (see Question 4).

VAT

The sale of an asset by an authorised dealer in the ordinary course of his business is generally subject to VAT (see Question 5).

Appreciation tax

Capital gains accruing from the sale of rights in real estate in Israel or rights in an Israeli real estate company are subject to appreciation tax (see Question 6).

Betterment levy

In the event that, as a result of modifications in the assignment or building rights in respect of certain land (that is, additional building rights or a change in the designation of the land), there is an increase in the value of the land, the owner of the land is liable to pay betterment levy to the local or regional authority (see Question 6).

 

Exemptions and reliefs

15. Are any exemptions or reliefs available to the liable party?

Certain exemptions and reliefs are applicable (see Questions 3 to 6).

 

Tax advantages/disadvantages for the buyer

16. Please set out the tax advantages and disadvantages of an asset acquisition for the buyer.

Advantages

Depreciation is generally available on the purchase of capital assets, subject to certain restrictions in law.

Disadvantages

Generally, the purchase cost of the asset cannot be fully deducted as a tax expense at the time of the purchase.

 

Tax advantages/disadvantages for the seller

17. Please set out the tax advantages and disadvantages of an asset disposal for the seller.

Advantages

The seller may be able to take advantage of the capital gains exemptions referred to in Question 4.

Disadvantages

Generally, losses on disposals of capital assets cannot be set-off against business income.

An asset disposal is taxable both at the corporate level and at the shareholder level (by withholding tax on dividends).

 

Transaction structures to minimise the tax burden

18. What transaction structures (if any) are commonly used to minimise the tax burden?

There are no specific commonly used structures to minimise tax on the purchase of assets.

 

Legal mergers

Taxes potentially payable

19. What taxes are potentially payable on a legal merger?

For Israeli tax purposes, a merger of companies generally triggers a capital gains event.

 

Exemptions and reliefs

20. Are any exemptions or reliefs available to the liable party?

A sale of rights in a transferor company in connection with a merger, and the transfer of a transferor company's assets to a merged company in connection with a merger, are not liable to tax if the sale was consummated in accordance with the terms and conditions of chapter E(2) of the Income Tax Ordinance.

 

Transaction structures to minimise the tax burden

21. What transaction structures (if any) are commonly used to minimise the tax burden?

In most cases, merger transactions are streamlined to satisfy the requirements of chapter E(2) of the Income Tax Ordinance.

 

Joint ventures

Taxes potentially payable

22. What taxes are potentially payable on establishing a joint venture company (JVC)?

Joint ventures (whether registered or unregistered) are entitled to special tax treatment. To benefit from this special tax treatment, the taxpayer must be able to prove to the Israeli tax authorities that a business or vocation is carried on by two or more persons jointly ("persons" include individuals, companies, partnerships and other bodies of persons). The tax treatment to which joint ventures are subject is "transparent" for taxation purposes. Therefore, the share of the joint venture's income, to which each partner is entitled in the relevant tax year, will be regarded as the partner's income and should be included in the return of income to be submitted by him in addition to his other income. Therefore, the individual partners (and not the partnership) are regarded as the taxpayers for taxation purposes.

 

Exemptions and reliefs

23. Are any exemptions or reliefs available to the liable party?

As the joint venture income to which each partner is entitled is regarded as income actually earned by each partner, all of the tax exemptions applicable to the partners will similarly apply to the income earned by the joint venture (for example, an exemption for income from personal exertion derived by a blind or disabled person).

 

Transaction structures to minimise the tax burden

24. What transaction structures (if any) are commonly used to minimise the tax burden?

As the joint venture income to which each partner is entitled is regarded as income actually earned by each partner, partners to a joint venture who are entitled to specific tax exemptions may also apply those exemptions to minimise the tax burden with respect to income derived by the joint venture.

 

Company reorganisations

Taxes potentially payable

25. What taxes are potentially payable on a company reorganisation?

As long as the reorganisation of the company does not entail a sale of capital assets (including any disposal or exchange of shares), no tax will be levied following the reorganisation. However, a transfer or exchange of shares, or any other capital asset (including a transfer of assets/shares to a new subsidiary or to a listed company) within the reorganisation can give rise to capital gains tax on the disposal by the seller.

Generally, the allotment of new stocks does not, in and of itself, trigger a taxation event.

 

Exemptions and reliefs

26. Are any exemptions or reliefs available to the liable party?

A transfer or exchange of shares or any other capital asset (including the transfer of a trade to a new subsidiary) within a reorganisation of a company, should not be subject to tax if executed in accordance with the terms and conditions of chapter E(2) of the Income Tax Ordinance, subject to receipt of a pre-ruling from the Israeli Tax Authority.

 

Transaction structures to minimise the tax burden

27. What transaction structures (if any) are commonly used to minimise the tax burden?

Generally, subject to receipt of a pre-ruling from the Israeli Tax Authority, the reorganisations of companies which include a transfer or exchange of shares, or any other capital asset, are streamlined to satisfy the requirements of chapter E(2) of the Income Tax Ordinance.

 

Restructuring and insolvency

28. What are the key tax implications of the business insolvency and restructuring procedures in your jurisdiction?

Tax implications for the business

A company remains liable for corporation tax on any profits generated by it on it being wound-up. If a liquidator continues the trade of the company, the usual corporation tax rules will apply in calculating the company's tax liabilities. In addition, profits from the sale of assets by the liquidator are deemed a taxable capital gain of the company.

Tax implications for the owners

At the commencement of winding-up, any shares or other rights of a share holder of the company will be deemed to have been sold, and any asset received by a shareholder from the liquidator following the company's winding-up will be deemed consideration for the said shares or rights.

Tax implications for the creditors

Generally, expenses incurred during a company's winding-up, including taxes, will rank in priority to unsecured expenses incurred prior to the commencement of winding-up.

 

Share buybacks

Taxes potentially payable

29. What taxes are potentially payable on a share buyback? (List them and cross-refer to Questions 3 to 6 as appropriate.)

Generally, any repayment over and above the amount which the company received for a subscription of shares is treated as a capital gains tax event (see Question 4). However, if certain conditions are met (mainly, when the share buyback applies to all of the shareholders, pro rata), a share buyback may be construed as a distribution of dividends.

 

Exemptions and reliefs

30. Are any exemptions or reliefs available to the liable party?

As stated in Question 8, dividends paid by an Israeli resident company to another Israeli resident company are exempt from tax (unless the dividend derives from income generated by that Israeli company abroad). Therefore, a share buyback by an Israeli resident subsidiary which is treated as a distribution of dividends (see Question 29) should be exempt from tax, if the parent company is deemed an Israeli resident for tax purposes.

 

Transaction structures to minimise the tax burden

31. What transaction structures (if any) are commonly used to minimise the tax burden?

No specific structures are commonly used in order to minimise the tax burden with respect to a share buyback.

 

Private equity financed transactions: MBOs

Taxes potentially payable

32. What taxes are potentially payable on a management buyout (MBO)?

No specific tax treatment exists with respect to MBOs.

 

Exemptions and reliefs

33. Are any exemptions or reliefs available to the liable party?

Not applicable.

 

Transaction structures to minimise the tax burden

34. What transaction structures (if any) are commonly used to minimise the tax burden?

Not applicable.

 

Reform

35. Please summarise any proposals for reform that will impact on the taxation of corporate transactions.

At present, no proposal for any fundamental reform has been submitted that will impact on the taxation of corporate transactions.

 
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