Corporate Inversion – Turning an Israeli Company into a Foreign Company

Generally speaking, a corporation inversion is a process of changing the holding structure of an existing company by transferring all of the existing company’s issued share capital from its shareholders to a new company, in consideration for an allotment of shares in the new company to the transferor shareholders.

Thus, the shareholders become the owners of the new company, while the new company holds all the shares of the existing company, which becomes a subsidiary of the new company.

In Israel, one of the most prevalent corporate inversion types in recent years is the process to turn an existing Israeli company into a foreign company. This process takes place by positioning a foreign company as a parent company of the Israeli company and transferring the shareholders’ holdings from the Israeli company to the foreign company. Such corporate inversions are carried out to enable expansion into new market in the international arena, facilitate capital raising from foreign sources, enable expansion into markets where Israeli companies are not particularly welcome, etc.  

Tax Aspects of an Israeli Company Becoming a Foreign Company

In addition to the corporate process, a corporate inversion constitutes a tax event for the transferor shareholders, who may be deemed to have sold their shares in the existing Israeli company in consideration for shares to be allotted to them in the new company.

In such instance, the corporate inversion obligates the shareholders to file a report with the Israel Tax Authority (ITA) and pay the tax accordingly.

However, pursuant to the provisions of the Income Tax Ordinance, upon meeting particular conditions, the corporate inversion may be executed with a tax exemption (or, to be more precise, with a tax deferral until a future disposal date). However, this involves submitting a notice to the ITA and, in many instances, also obtaining a tax pre-ruling from the ITA before executing the corporate inversion (for example, when the absorbing company is a foreign resident company).

In order to facilitate the process with the ITA and shorten the procedure for obtaining a tax pre-ruling, the ITA has published a “green track” ruling that, under certain conditions , enables companies to submit an application and receive a tax pre-ruling using a designated form.

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Barnea Jaffa Lande’s Tax Department has extensive experience in this field and is at your service to provide advice and guidance during corporate inversions and in obtaining tax pre-rulings from the ITA.

Adv. Hanna Daher is a partner in our firm’s Tax Department.