This document summarizes the tax treatment of acquisitions in Israel, including differences between stock acquisitions and asset acquisitions, availability of step-up in basis for assets, tax benefits of issuing stock as consideration, documentary taxes payable, treatment of net operating losses, interest deductibility, and protections typically sought. It also discusses various post-acquisition restructuring options in Israel such as tax-neutral spin-offs and preservation of net operating losses, migration of company residence, withholding tax rates on outbound interest and dividend payments, and other tax-efficient means of extracting profits.

1. Tax on Inbound Investment
in 40 jurisdictions worldwide
Contributing editors: Peter Maher and Lew Steinberg 2009
Published by
getting the deal through
in association with:
A & L Goodbody
Abraham & Co (Solicitors, Advocates and Notary Public)
Arzinger & Partners
Blum & Grob Attorneys at Law
Boga & Associates
Borden Ladner Gervais LLP
Carey y Cía
Cerrahog˘lu Law Office
CHSH Cerha Hempel Spiegelfeld Hlawati
CMS Bureau Francis Lefebvre
Dahl Law Firm
DLA Piper UK LLP
Doria, Jacobina, Rosado e Gondinho Advogados Associados
Edward Nathan Sonnenbergs Inc
Gross, Kleinhendler, Hodak, Halevy, Greenberg & Co
GVTH Advocates
Hoet Peláez Castillo & Duque
Iason Skouzos & Partners Law Firm
Kooi Worldwide Tax
Luthra & Luthra Law Offices
Mallesons Stephen Jaques
McEwan & Asociados SC
Mijares, Angoitia, Cortés y Fuentes SC
Miranda & Amado Abogados
Molitor Fisch & Associés
Orrick Hölters & Elsing
Patrikios Pavlou & Co
Prijohandojo, Boentoro & Co
Proskauer Rose LLP
Raidla Lejins & Norcous
Reed Smith
Reyes Abogados Asociados
Roschier, Attorneys Ltd
Salans
Shearn Delamore & Co
Simpson Grierson
Vorlícˇková & Leitner sro
White & Case LLP
®

2. www.gettingthedealthrough.com 97
Gross, Kleinhendler, Hodak, Halevy, Greenberg & Co Israel
Israel
Samuel Borenstein and Yaron Eli
Gross, Kleinhendler, Hodak, Halevy, Greenberg & Co
The acquisition (from the buyer’s perspective)
1 Tax treatment of different acquisitions
What are the differences in tax treatment between an acquisition
of stock in a company and the acquisition of business assets and
liabilities?
The main differences between an acquisition of stock and an acquisi-
tion of assets and liabilities are as follows:
• by purchasing the assets and liabilities of the target company,
the buyer achieves a step-up in the basis which may increase the
depreciation expenses and thereby reduce the taxable income.
With a stock transaction, the asset basis is not stepped-up, but
tax losses of the target company may be transferred to the buyer;
and
• if the assets include real estate in Israel, purchase tax will be
payable in the amount of 5 per cent (in most cases). There is no
purchase tax applicable to the sale of stock, unless the target
company is defined as a ‘real estate company’ (ie, a company’s
whose assets are mostly real estate).
VAT (currently 15.5 per cent) may be payable upon the purchase of
the assets (including goodwill). There is no VAT due, however, on the
sale of stock and most other securities (other than when the target
company’s assets are mostly real estate).
Under a special regulation the purchase of stocks may allow the
buyer to benefit from a tax exemption when the stocks are sold in
the future. This exemption applies where the acquisition of stocks
occurred after 1 July 2005 and before 31 December 2008 and only
where the buyer has been resident for at least 10 years in a state that
has a tax treaty with Israel.
2 Step-up in basis
In what circumstances does a purchaser get a step-up in basis in
the business assets of the target company? Can goodwill and other
intangibles be depreciated for tax purposes in the event of the
purchase of those assets, and the purchase of stock in a company
owning those assets?
An assets transaction allows a step-up in basis in the business assets
of the target company.
According to the Israeli Tax Laws, goodwill may be depreciated
during a period of 10 years. The Supreme Court of Israel has held
that the most appropriate method to value goodwill transferred in
a business sale is the residual method, unless the parties specifically
assigned a value to goodwill. In this method, the consideration is
allocated to physical assets and intangibles that can be readily valued
and the residual consideration is the value of the goodwill.
Generally, patents, designs, know-how and other intangibles are
not depreciated for tax purposes. Notwithstanding, intangible assets
could be depreciated in specific circumstances (eg, in an industrial
company).
3 Execution of acquisition
Is it preferable for an acquisition to be executed by an acquisition
company established in or out of your jurisdiction?
There is no significant tax benefit to using a non-Israeli company to
execute the acquisition, assuming that the ultimate ownership would be
the same. Moreover, distribution of dividend between two Israeli com-
panies is generally not subject to tax, where a 25 per cent withholding
is imposed on distribution of dividends to non-Israeli companies unless
a reduced rate is introduced under an applicable tax treaty.
Israel has tax treaties with more than 40 countries. Those trea-
ties not only allow a reduced withholding tax rate on dividends and
interest, but also a capital gains exemption. Therefore, a sale of shares
of an Israeli company will not normally give rise to Israeli capital
gains tax.
4 Company mergers and share exchanges
Are company mergers or share exchanges common forms of
acquisition?
Company mergers and share exchanges are a common form of acqui-
sition in Israel. Share exchanges occur most often between publicly
traded companies.
Subject to fulfilling certain criteria, mergers and reorganisations
of companies are practically tax-free, including capital gains on real
property, and VAT. Moreover, share exchanges do not incur tax and
provide, where appropriate, a swift way to acquire a target company.
In both transactions (mergers and share exchanges), the value of the
stock of the target company is carried over.
5 Tax benefits in issuing stock
Is there a tax benefit to the acquirer in issuing stock as consideration
rather than cash?
Generally, there is no special tax benefit attached to a share-for-share
transaction as opposed to a cash transaction. This notwithstanding,
from the seller’s perspective, stock paid as consideration may be
exempt from tax if the transaction meets the following conditions:
• the transferring shareholders receive publicly traded shares;
• the transferring shareholders receive consideration that is equal
to the value of the shares they transferred, in economic terms;
• the transferring shareholders receive shares bearing equal
rights;
• the transferring shareholders transfer all of their interests in the
company that they sell, including those held by related parties;
and

3. Israel Gross, Kleinhendler, Hodak, Halevy, Greenberg Co
98 Getting the Deal Through – Tax on inbound investment 2009
• the approval of the Israeli Tax Authority (ITA) has been
granted.
If the transaction meets the above conditions, the shares received
should be placed in escrow with an escrow agent approved by the
ITA. The transferring shareholders pay tax on the stock considera-
tion in two stages:
• 50 per cent of the shares are subject to capital gains tax when
the recipient sells the shares, or two years after the transaction
(whichever is earlier); and
• 50 per cent of the shares are subject to capital gains tax when
the recipient sells the shares, or four years after the transaction
(whichever is earlier).
Stock as consideration may also be exempt from tax if the stocks paid
by the purchaser are of a private company. Such exemption will be
subject to several requirements the main of which are as follows:
• at least 80 per cent of the rights in the merging company must be
transferred;
• the consideration must be in shares only (not including options
and similar derivative rights); and
• a lock-up period of two years (with respect to the rights in the
acquiring company and the target company) should be main-
tained with several exceptions.
The tax authorities have indicated that this exemption can be applied
to ‘triangular mergers’, in which a statutory merger is effected
between the target and a wholly owned subsidiary of the purchaser
formed specifically for the merger.
6 Taxes payable on an acquisition
Are documentary taxes payable on the acquisition of stock or business
assets and, if so, what are the rates and who is accountable? Are any
other transaction taxes payable?
The relevant taxes from the buyer’s perspective may be as follows:
• purchase tax – if the assets include real estate in Israel there will
be a purchase tax of 5 per cent. No purchase tax applies on a
purchase of stock, unless the purchased company is defined as a
‘real estate company’ (ie, a company whose assets are mostly in
real estate);
• VAT – by purchasing the assets of the target company, including
goodwill, VAT may be payable thereon (currently 15.5 per cent).
An asset acquisition involves VAT on the price of the assets sold,
with the buyer crediting the VAT as input tax against VAT on
the target company own sales. No such tax is payable on the sale
of stock and most other securities (not including stock of a ‘real
estate company’); and
• stamp duty – as of 1 January 2006, Israeli stamp duty has been
abolished.
7 Net operating losses
Do net operating losses survive a change in control of the target? If
not, are there techniques for preserving them?
Where the stock of the asset is acquired, the net operating losses are
generally preserved in the same manner as if there was no change
of control.
However, tax losses may no longer be available if the com-
pany goes through a significant change in its activity or changes its
purpose.
Moreover, a Supreme Court precedent limits the buyer’s ability to
use the accumulated losses if the acquisition lacks business purposes
other than gaining access to these losses.
8 interest relief
Does an acquisition company get interest relief for borrowings to
acquire the target? Are there restrictions on deductibility where the
lender is foreign, a related party, or both? Can withholding taxes
on interest payments be easily avoided? Is debt pushdown easily
achieved?
Generally, no interest relief for borrowings to acquire the target is
allowed, whether the lender is foreign or a related party or Israeli
or non-related party. The interest is added to the cost basis of the
shares.
The debt pushdown is generally achievable by the merger between
the acquiring company (usually an SPV) and the target company sub-
sequent to the direct acquisition of the target’s shares. The ability to
effect a debt pushdown and to entail the deduction of the interest by
the target company depends upon the circumstances of the particular
transaction and requires meticulous planning.
Withholding on interest paid to foreign lender is 20 per cent or
25 per cent unless a reduced rate is provided by an applicable tax
treaty (usually – 10 per cent or 15 per cent).
9 Protections for acquisitions
What forms of protection are generally sought for stock and business
asset acquisitions? How are they documented?
In Israel it is common to stipulate tax covenants, warranties and
indemnification provisions. Moreover, an escrow bank account is
created to hold part of the acquisition price in order to guarantee the
payment of some identified or non-identified contingencies. How-
ever, whether stock or assets are acquired, the protection intends to
hold the buyer harmless against any tax and social tax liability relat-
ing to the period ending on and before the closing date.
Post-acquisition planning
10 Restructuring
What post-acquisition restructuring is typically done and why?
Post-acquisition planning depends on the structure that has been
finalised, the size of its capital and the identity and diversification
of its shareholders. It also depends on whether the main aim is the
reinvestment or the distribution of profits. For example, if the target
company is part of a business group, it is possible to develop cor-
porate reorganisations in such a way that the appropriation of tax
losses and other tax credits can be optimised and the regular tax
burden of the relevant companies reduced.
11 Spin-offs
Can tax neutral spin-offs of businesses be executed and, if so, can the
net operating losses of the spun-off business be preserved?
Tax-free spin-offs can be carried out in Israel as follows:
• horizontal splits: where the shareholders of the new company are
identical to those of the divesting company; and
• vertical splits: where the new company is a fully owned subsidi-
ary of the divesting company.
The tax exemption for horizontal and vertical splits is subject to the
following conditions:
• the split must have valid economic business purposes;
• the divesting company and the new companies should be either
Israeli companies or Israeli cooperative societies. The Israel Tax
Authority may approve a foreign company as a participant
in a split, but this is usually subject to certain limits. In addi-
tion, guarantees are required to ensure that the tax due on any

4. www.gettingthedealthrough.com 99
Gross, Kleinhendler, Hodak, Halevy, Greenberg Co Israel
retained earnings and unrealised gains in the exported assets will
be paid;
• the value of assets transferred to any company in the split and
that of the assets retained by the divesting company must be
equal to at least 10 per cent of the total asset value of the divest-
ing company before the split (ie, a company cannot split into
more than 10 companies);
• the market value of each resulting company cannot exceed four
times the market value of any other resulting company;
• immediately after the split, the value of assets in each company
must exceed the value of its obligations;
• no cash or other consideration is permitted to be paid;
• the approval of the ITA must be obtained in advance. The ITA
can also approve a deviation from the above asset ratios;
• there must be a continuity of the business enterprise; the major-
ity of the assets transferred in the split must be maintained by
the recipient companies for two years after the split and used in
their business operations and each of the companies must have
independent business activity subject to tax in Israel;
• each shareholder of the divesting company must receive rights
in the new companies in proportion to its rights in the divesting
company before the split;
• each shareholder of the divesting company cannot transfer his
shares during the two years after the split. This is subject to cer-
tain exceptions; and
• for two years after the split, no asset transfers, provisions of
guarantees or cash transfers are allowed between the resulting
companies, except for transactions in the ordinary course of
business.
A split that meets the above conditions involves a rollover of the base
cost in the transferred assets to the recipient company, and a cor-
responding base cost to the shareholders in their shares. Further, the
tax attributes of the divesting company (retained earnings, operating
losses and so on) are split between the resulting companies, usually
in proportion to their value.
However, only 20 per cent of the losses can be offset each year
and only up to 50 per cent of the income on this year.
12 Migration of residence
Is it possible to migrate the residence of the acquisition company or
target company from your jurisdiction without tax consequences?
When a company ceases to be an Israel resident, it is deemed to have
disposed of and reacquired all of its assets at market value immedi-
ately before becoming a non-resident and a liability to Israel corpora-
tion tax may arise.
This ‘exit tax’ can be avoided in certain circumstances, for exam-
ple where immediately after the company becomes non-resident, the
assets are still used in a trade carried on in Israel through a per-
manent establishment. The tax charge would be deferred in these
circumstances until the Israel assets will actually be disposed of, the
permanent establishment trade ceases, or the assets become situated
outside Israel.
13 interest and dividend payments
Are interest and dividend payments made out of your jurisdiction
subject to withholding taxes and, if so, at what rates? Are there
domestic exemptions from these withholdings or are they treaty-
dependent?
According to the Israeli Tax Laws, there is a requirement to withhold
tax on dividends or interest at the following rates:
• payment to foreign companies: 20 per cent (or 25 per cent if the
foreign company is a ‘controlling shareholder’ (ie, holds, directly
or indirectly, alone or together with others, 10 per cent or more
of one of the Israeli resident company’s means of control at the
time of distribution or at any time during the preceding 12-month
period);
• payment to individuals: 20 per cent (or 25 per cent if the indi-
vidual is a controlling shareholder); and
• a distribution of a dividend from income attributed to an
‘approved enterprise’ will be subject to a reduced tax at the rate
of 15 per cent.
However, a reduced tax rate may apply if permitted by the tax
authorities or if provided in a relevant tax treaty.
Dividends paid by an Israeli subsidiary to its Israeli parent are
generally tax-exempt.
14 Tax-efficient means for extraction of profits
What other tax-efficient means are adopted for extracting profits from
your jurisdiction?
Certain transactions entered into at arm’s-length can serve as vehicles
for extracting profits outside Israel. Such transactions could include
outsourcing of activities, know-how, licences, intellectual property
rights and management fees, as well as transactions with controlled
companies such as an agreement between a company and its par-
ent for the use of administration facilities or intellectual property
provided by the parent company. All these methods are all subject to
normal transfer-pricing regulation.
Disposals (from the seller’s perspective)
15 Disposals
How are disposals most commonly carried out – a disposal of the
business assets, the stock in the local company or stock in the foreign
holding company?
The business asset disposal structure is used to protect the buyer from
bearing past liabilities of the company including tax liabilities. How-
ever, the common method is the disposal of stock. From the seller’s
perspective this method prevents double taxation, namely on the sale
of assets by the company and then on the distribution of the proceeds
to the shareholders. Moreover, this method would allow the seller to
benefit from capital gain tax exemption either through an applicable
tax treaty or a domestic tax relief as described above.
16 Disposals of stock
Where the disposal is of stock in the local company by a non-resident
company, will gains on disposal be exempt from tax? Are there special
rules dealing with the disposal of stock in real property, energy and
natural resource companies?
Most Israeli tax treaties provide for exemption of capital gains from
taxation. However this exemption does not apply when the shares
are attributable to an Israel permanent establishment. Furthermore,
this exemption will not apply to shares in a real estate company or
with respect to several treaties, where the majority of the company
assets are real estate.
There is no special Israel tax regime for the disposal of stock in
energy or natural gas companies. However, according to the Israeli
tax law, a foreign resident who sells shares of an RD company or
Israeli-traded securities, is exempt from capital gains tax.

5. Israel Gross, Kleinhendler, Hodak, Halevy, Greenberg Co
100 Getting the Deal Through – Tax on inbound investment 2009
17 Avoiding and deferring tax
If a gain is taxable on the disposal either of the shares in the local
company or of the business assets by the local company, are there
any methods for deferring or avoiding the tax?
Provided that the requirements of the relevant provisions of the
Israeli Tax Laws related to reorganisations are met, the contribution
of a business or of shares in exchange for shares in the transferee
company qualifies as a tax-free transaction.
According to the Israeli Tax Laws, roll-over relief is available
under certain conditions where tax is payable on the disposal of busi-
ness assets provided the proceeds from the sale are invested back into
a corresponding asset of at least equal value within a year.
There has been new tax reform regarding new immigrants to Israel or
returning residents. According to the new rules, a new immigrant to
Israel will be exempt from tax, in general, for 10 years on all of his or
her foreign income.
Accelerated depreciation on assets that an industrial company
would purchase until 31 May 2009 has been introduced.
As described above, in the sale of stock, the buyer will be able to
resell the same at any profit without paying any capital tax thereon.
This exemption will be apply only if the acquisition of stock was after
1 July 2005 and before 31 December 2008 and only if the buyer is
a foreign resident in a country that has a tax treaty with Israel for at
least 10 years prior to the transaction. It is our understanding that ITA
intends to extend such relief for a foreign resident purchaser for an
additional year, that is, until 31 December 2009.
Israeli companies are currently subject to tax at the rate of 27
per cent of taxable income. Beginning from 2004, there has been a
gradual reduction in the Israeli corporate tax rate from 35 per cent
in 2004 to 34 per cent in 2005, 31 per cent in 2006, 29 per cent in
2007, 27 per cent in 2008, 26 per cent in 2009 and in 2010 and
thereafter – 25 per cent. However, the effective tax rate payable by
a company that derives income from an approved enterprise may be
considerably less.
Update and trends
Samuel Borenstein samuelb@gkh-law.com
Yaron Eli yarone@gkh-law.com
One Azrieli Center (Round Building) Tel: +972 3 607 4444
Tel Aviv 67021 Fax: +972 3 607 4433
Israel www.gkh-law.com

6. Tax on Inbound Investment
in 40 jurisdictions worldwide
Contributing editors: Peter Maher and Lew Steinberg 2009
Published by
getting the deal through
in association with:
A L Goodbody
Abraham Co (Solicitors, Advocates and Notary Public)
Arzinger Partners
Blum Grob Attorneys at Law
Boga Associates
Borden Ladner Gervais LLP
Carey y Cía
Cerrahog˘lu Law Office
CHSH Cerha Hempel Spiegelfeld Hlawati
CMS Bureau Francis Lefebvre
Dahl Law Firm
DLA Piper UK LLP
Doria, Jacobina, Rosado e Gondinho Advogados Associados
Edward Nathan Sonnenbergs Inc
Gross, Kleinhendler, Hodak, Halevy, Greenberg Co
GVTH Advocates
Hoet Peláez Castillo Duque
Iason Skouzos Partners Law Firm
Kooi Worldwide Tax
Luthra Luthra Law Offices
Mallesons Stephen Jaques
McEwan Asociados SC
Mijares, Angoitia, Cortés y Fuentes SC
Miranda Amado Abogados
Molitor Fisch Associés
Orrick Hölters Elsing
Patrikios Pavlou Co
Prijohandojo, Boentoro Co
Proskauer Rose LLP
Raidla Lejins Norcous
Reed Smith
Reyes Abogados Asociados
Roschier, Attorneys Ltd
Salans
Shearn Delamore Co
Simpson Grierson
Vorlícˇková Leitner sro
White Case LLP
®