By Artzi, Hiba, Elmekiesse, Cohen – Tax Solutions Ltd.
The Israeli Tax Authority has recently published a new green path, the subject matter of which is an application in advance for the transfer of all of the rights in a company that is resident in Israel to a company that is not resident in Israel with which the State of Israel has a tax treaty, in consideration for the allocation of shares – a process that is generally called – “Corporate inversion”.
Corporate inversion is a name for the arrangement of activity that causes a change in the structure of the holdings in companies, such as in this case, in which the shareholders of a company that is resident in Israel sets up a new foreign company (hereinafter: “The absorbing company” or “The foreign company”) transfer all of their rights in the company resident in Israel to it (hereinafter: “the transferred company” or “The company”) in consideration for the allocation of shares in the absorbing company. The main reasons for such a process are: entry into new markets, the recruitment of foreign investors, issuance considerations and etcetera. A corporate inversion is deemed to be a tax event at the level of the shareholders of the transferred company as a result of the sale of their rights in it. However, insofar as the condition is met, it will be possible to receive a deferral of the tax event until the time of the sale of the rights in the absorbing company and in this special case, even if the absorbing company is a foreign company. However, we will mention that transfers of assets (including shares in an Israeli company) to such a foreign company are only possible with the approval of the Director of the
Israeli Tax Authority.
In the distant past, the Tax Authority published a tax ruling under agreement, which dealt with a similar case. Furthermore, changes have occurred in the legislation in the event of a structural change and ancillary reliefs. The new green path, which were we are discussion in this bulletin, has been published within the spirit of these matters.
The main conditions:
- The transferred company has been incorporated after 1.1.2018.
- The absorbing company is not a transparent entity (in its country of residence), it is a new company that has been incorporated for the purpose of the structural change and it has not assets or liabilities whatsoever as at the time of the structural change.
- The application is submitted within a period of three months preceding the structural change.
- There is no consideration in money or in money’s worth in respect of the transfer of the shares.
- The tax rate for companies in the foreign company’s country of residence exceeds 15% and there is taxation on passive profits in companies outside of that country, which are controlled by the foreign company (CFC rules).
- The rate of tax to be deducted at source, which is set in the treaty between the two countries on the distribution of dividend from the company to a foreign company is at least 10%.
- There is no transfer of tangible assets, activity and/or intangible assets in the company being transferred outside of Israel.
The distribution of a dividend and capital gains on the sale of shares
When a dividend is distributed from the company to a foreign company, which is sourced in profits that have arisen until the end of a period of two years following the end of the tax year in which the structural change is made (hereinafter: “The period”), the foreign company will be chargeable at the rate of 30% in Israel. When a distribution is made out of profits that have been made after the period, the foreign company will be chargeable with tax in Israel on a dividend in accordance with the provision of the treaty. Furthermore, an arrangement has been determined for a credit for the tax deducted at source as aforesaid, at the time of the distribution of the dividend from the foreign company to the holders of the rights.
The sale of the shares being transferred by the foreign company is to be made pro-rata and will be viewed as if they had been sold by a company that is resident in Israel (in accordance with the “standing in the place of” principle, which is chargeable with capital gains tax in Israel without a right of deduction, offset, exemption or credit (including from foreign tax), and the sale of the shares that are allocated in the absorbing company will be chargeable with tax and done in accordance with the provisions of the Israel Tax Ordinance.