• International Law office
    • Tax Notes International
      • BNA - Business Operations in Israel

        1.Factual Background

        1.1The "Corporation” purchased in the past, shares of its parent corporation ("Shares” and "Parent Corporation” respectively). At the time of the purchase the Parent Corporation held 60% of the share capital of the Corporation.

        1.2The shares were sold by the Corporation on three different occasions:


        1.2.1At first the Corporation sold 3,000 shares;

        1.2.2Afterwards, the Corporation entered into an exchange transaction pursuant to which it transferred shares of the Parent Corporation to an investor in consideration for its own shares. The exchange ratio was determined in accordance with the respective stock exchange prices;


        1.2.3The Corporation sold the remainder of the shares it held in the Parent’s Corporation to a third party ("Resale”).

        1.3At the time of the Resale, the Parent Corporation held all the share capital of the Corporation after having purchased the minority interests during the year preceding the Resale, within the framework of an exchange of shares of the Corporation for the issuance of shares by the Parent Corporation within the ambit of a merger.

        1.4In the consolidated financial report of the Parent Corporation, the shares held by the Corporation were registered as "Treasury Stock” and the Resale was depicted as their issuance. The Corporation recorded the Shares as an "investment” and upon their Resale a capital gain was recognized.

        2.Question Posed

        What is the appropriate tax treatment of the Resale?


        3.1The opinion examined, inter-alia, the accounting practices relevant to the Resale, the relationship of financial accounting to tax accounting, other provisions of Israeli and foreign law, and based upon them concluded that the Resale was tantamount to the issue of the Shares.

        3.2The opinion demonstrated various other means by which the Corporation could have achieved the same economic results achieved by the Resale. These methods could lead to instances where cross holdings could be used to create tax free gains and in cases of losses they would lead to the conclusion that the capital loss was available for a set-off.

        3.3The opinion’s conclusion was based on the examination of the economic substance of the transaction and the relationship of the Parent Corporation and the Corporation; the priority of substance over form and the desire to collect tax from real and not virtual profits, as well as statutory provisions and precedents lending weight to this conclusion.

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