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
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.
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.