Faster flips
In October 2018, the Israel Tax Authority (ITA) published a new fast track procedure for shareholders wishing to flip an Israeli company. That means putting a foreign parent company (“ParentCo”) above the Israeli company. This happens quite often, especially in the hi-tech sector.
For example, a US pension fund may prefer to invest in an Israeli company via a US parent company.
And UK investors may benefit from a series of UK incentives if they invest in an Israeli company via a UK ParentCo, including: 1) EIS (Enterprise Investment Scheme) relief, a 30% UK tax credit upon investment; 2) UK capital gains tax if they sell their shares after more than 3 years; and 3) Possible enlarged foreign tax credit (“tax-sparing relief”) if the Israeli company enjoys Israeli “privileged enterprise” tax breaks (9% or 16% company tax) and pays a dividend to the UK ParentCo.
ITA clearance is needed to avoid an immediate Israeli capital gains tax liability on the paper gain. But obtaining the clearance could be a slow process
The Israeli fast track procedure helps the founders and other Israeli resident shareholders request a taxfree swap of their shares in the Israeli company for shares in the foreign ParentCo. This is done by filing a “green track” Israeli Tax Form 982 with the ITA. Clearance is still needed from the ITA, but Form 982 specifies the likely ITA conditions.
These are the main fast track terms for a flip in Form 982. The Israeli company shareholders transfer all their rights. The foreign ParentCo must be resident in a country that has a tax treaty with Israel. Share consideration only is allowed, no cash. The conditions of Section 104B(a) of the Income Tax Ordinance (see below) must be met. Application must be made within three months before the flip. Employees on share option plans are included, but the minimum required vesting period with a trustee, usually two years under Section 102 of the Income Tax Ordinance, starts afresh.
All activity and assets, tangible and intangible, of the Israeli company must stay within that company. The statutory tax rate in the other treaty country must be at least 15% and the country must have anti-CFC (controlled foreign company) for taxing passive foreign company profits. The ParentCo must be an empty new company formed for the purpose of the flip and cannot be fiscally transparent (i.e. no US LLCs). An approved trustee must the Israeli resident transferor (flipping) shareholders' rights until tax is paid upon a future sale. At that point, any credit for foreign tax and any claim to the 10-year immigration exemption requires ITA clearance.
These are the main terms of Section 104B(a) of the Income Tax Ordinance which must also be met.
The pro-rata rights of each shareholder stays unchanged; in the requisite period the share of the shareholders does not drop below 25% (except for R&D intensive companies – defined restrictively); the ParentCo retains the shares of the Israeli subsidiary company throughout the requisite period; and the ParentCo confers the same pro-rata value of rights in the company to each of the shareholders as their earlier pro rata share of value of the shares of the Israeli company.
The requisite period is generally two years from the transfer date.
If it works, this fast-track flip procedure will further help Israeli tech and other companies integrate into the global economy. Employment and intellectual property (IP) should remain in Israel. The foreign ParentCo may be useful for marketing, fund-raising and IPO purposes.
Form 982 is addressed to the ITA director, which is just as well because the local tax offices can be slow in dealing with other fast-track applications, such as Form 905 (foreign inheritances). Let's hope the ITA Director encourages the ITA staff to deal efficiently with Form 982 flips.
As always, consult experienced tax advisers in each country at an early stage in specific cases.