Quarterly International Tax Update – Israel’s Latest Legislative and Regulatory Developments
We are pleased to share our latest Quarterly Tax Update, summarizing key legislative and regulatory developments in Israel that may be relevant to international businesses and investors. We hope you find this information useful and welcome any inquiries or discussions regarding its implications for your operations.
Temporary Provision Regarding Closely Held Companies
A temporary provision for 2025 exempts from taxes the increase in value of assets and funds while transferring them from closely held companies ("CHC") to their individual shareholders, provided that the transfer is made until November 30th, 2025 or in the case of the liquidation of a CHC and the transfer of its assets and funds to its individual shareholders, provided that the liquidation process commences by the end of 2025.
The temporary provision generally imposes taxes based on the cost of the transferred assets and funds in case of transfer of assets and funds or on the distributable profits for tax purposes in the case of liquidation, as dividend income. It should be noted that the transfers of real estate to an individual shareholder will be exempt from purchase tax and will be subject to 0% VAT.
The Israel Tax Authority published Professional Circular No. 3/2025, addressing the temporary provision. As mentioned above, the temporary provision sets out two preferential routes: the Asset Transfer Route and the Liquidation Route, both benefiting from significant tax reliefs. The circular clarifies that applications must be submitted using designated forms (Form 171 or 172) through the pre-ruling tax system.
Upon approval, further reporting is required using Forms 804 and 804A regarding the dividend tax payment. Additionally, where a real estate right (or a right in a real estate entity) is transferred, both the transferring and receiving parties are required to report the transfer to the Land Tax Office, attaching the relevant form. Particular attention should be given to cases involving indirect ownership structures. It should be noted that in the transfer of real estate right under the temporary provision, a betterment levy may apply. According to the circular, it is possible to apply to the Israel Tax Authority for a pre-ruling confirming that the temporary provision applies to individual non-Israeli residents who hold a CHC or to a non-Israeli resident CHC.
Draft Regulations Published on Taxation of Revaluation Profits
Under Israeli tax law, revaluation profits are not treated as taxable income when recognized in financial statements, in accordance with the realization principle. Amendment 197 added Section 100A1 to the Ordinance to address the distribution of revaluation profits that arose following the adoption of new accounting standards. Section 100A1 applies only to the distributing company and does not apply to the recipient.
Section 100A1 essentially deems the distribution of revaluation profits to constitute a sale and immediate reacquisition of the revalued asset as of the distribution date. A similar mechanism was added under Section 5(e) of the Real Estate Taxation Law, applying to revalued real estate or real estate association rights. However, Section 100A1 has not yet entered into force due to the requirement that the Minister of Finance, with the approval of the Knesset Finance Committee, define which types of revaluation profits are covered under this Section. Furthermore, under the transitional provisions of Amendment 197, the Section will apply to foreign assets only upon enactment of regulations preventing double taxation under Section 200 of the Ordinance—regulations which have also not yet been enacted.
On May 19, 2025, a draft of the Income Tax Regulations (Revaluation Profits), 2025, was published. The draft regulations specify which revaluation profits will fall under Section 100A1 of the Ordinance (i.e., not only real estate revaluation) and outline mechanisms to prevent double taxation in cases involving “non-Israeli assets,” including mechanisms for tax credits and refunds, modeled after Sections 75B(d1) and 96(c) of the Ordinance.
Tax Ruling Summary on Statutory Merger Involving a Public Shell Company
On March 3, 2025, the Restructuring Department of the Israel Tax Authority's Professional Division published a new summary tax ruling (the "Ruling"). The Ruling addresses a planned statutory merger between two Israeli resident companies: (1) a private company with substantial and ongoing business activity generating taxable income under Section 2(1) of the Income Tax Ordinance (the “Transferring Company”); and (2) a publicly listed company with no operations, assets, or liabilities other than carryforward tax losses under Sections 28 and 92 of the Ordinance and cash balances (the “Receiving Company”), which qualifies as a "public shell company."
Under the proposed structure, the Transferring Company will merge into the Receiving Company through a statutory merger under the first alternative of the definition of “merger” in Section 103 of the Ordinance. As a result, the Transferring Company will be dissolved without liquidation, and all its assets, liabilities, and operations will be transferred to the Receiving Company without triggering any immediate tax liability. In exchange for their shares, the shareholders of the Transferring Company will receive newly issued shares in the Receiving Company, also eligible for tax deferral.
The purpose of the merger is to achieve a public listing of the Transferring Company's business on the Tel Aviv Stock Exchange through the Receiving Company’s public shell structure, enabling access to new investors, diversified funding sources, and reduced IPO and prospectus costs. Notably, the Ruling specifies that all of the Receiving Company’s tax losses prior to the merger—of any kind— will be forfeited and may not be carried forward or otherwise utilized following the merger.
Tax Ruling Summary on Multi-Step Share Swap Transactions
The Restructuring Department of the Professional Division at the Israel Tax Authority has published a new summary tax ruling, issued as a tax ruling by agreement (the “Ruling”). The Ruling concerns a multi-step share swap involving three Israeli resident companies operating in the advanced technology sector. Company A is a private Israeli company wholly owned by individual Israeli shareholders (the "Exchanging Shareholders"). Company B is a public Israeli company traded on the Tel Aviv Stock Exchange and active in the same field. Company C is also a public Israeli company, listed on a U.S. stock exchange, and similarly engaged in advanced technology. On January 1, 20X1 (the "First Exchange Date"), the Exchanging Shareholders swapped all their shares in Company A for shares in Company B (the "First Exchange"). Prior to this exchange, the Exchanging Shareholders applied for and obtained approval under Section 104H(b)(1)(e) of the Income Tax Ordinance (the “Ordinance”), which confirmed the deferral of capital gains tax under Section 104H and included conditions related to trustee holding and deferral periods.
Approximately 18 months after the First Exchange and prior to the expiration of the deferral period, the shareholders of Company B—including the Exchanging Shareholders—received and accepted an offer to exchange their shares in Company B for shares in Company C (the "Second Exchange"), which was completed on July 1, 20X2 (the "Second Exchange Date"). No dividends were distributed by Company B during the interim period, and neither Company B nor Company C shares were classified as "blocked shares" under Section 104H. The Second Exchange involved no additional consideration, and the Exchanging Shareholders were not considered substantial shareholders in any of the companies during the 12-month period preceding the First Exchange through the Second Exchange.
The Ruling confirms that the Second Exchange qualifies under Section 104H(b)(1) of the Ordinance and will not be regarded as a taxable sale of the Company B shares under either the original tax ruling or Section 104H(c) of the Ordinance.
Tax Ruling Summary on Industrial Company Status
On Tuesday, May 27, 2025, the Encouragement Laws Department of the Israel Tax Authority’s Professional Division published a new summary tax ruling concerning the Law for the Encouragement of Industry (Taxes) (the “Ruling”). The Ruling appears to be a tax ruling by agreement, although this is not expressly stated in the Ruling. The facts underlying the Ruling involve an Israeli resident company (the “Company”) engaged—through directly and indirectly held partnerships (the “Partnerships”)—in electricity production.
The Company is responsible for initiating, financing, managing, and operating electricity generation facilities (the “Facilities”), while the actual electricity production is carried out by the Partnerships. The Company’s income includes revenues from electricity production attributable to its ownership in the Partnerships, service fees from managing the Facilities, interest income from loans to the Partnerships, and additional financing income from financial institutions.
The Company declared, among other things, that services are provided solely to its held Partnerships, all of which own active electricity generation Facilities. The Ruling holds that these Facilities constitute an “industrial enterprise” as defined in Section 1 of the Encouragement Law, and the electricity generation operations of the Partnerships are to be considered part of the Company’s industrial activity when assessing its qualification as an “industrial enterprise” and an “industrial company” under the Law.
Additionally, it was held that the combined enterprise of the Company and its Partnerships owning electricity generation Facilities qualifies as an “industrial enterprise” for purposes of the Law, provided that the principal activity of the Company and relevant Partnerships is electricity production. Furthermore, the Company will be considered an “industrial company” only if 90% of its income in the tax year derives from an industrial enterprise owned by it and located in Israel (“Income Condition”), and for this purpose, the Facilities held by the Partnerships will be deemed owned by the Company, and the income from electricity production by the Partnerships shall be attributed to the Company.
