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            Set Off of Losses Resulting From Depreciation of Land Value Located Outside Israel against Israeli Sourced Income (June 17th, 2009)

            1.Factual Background

            1.1A partnership engaged in the construction business was organized and held in equal parts by two Israeli individuals, "A” and "B”, by means of wholly owned corporations under their control.

            1.2The Partnership transferred funds abroad to acquire rights in foreign companies which owned real estate in Eastern Europe ("Subsidiaries”), managed by "A” and "B” and assisted by local real estate lawyers. The foreign companies were incorporated in order to overcome the prohibition on the direct ownership of real estate by foreigners.

            1.3The real estate owned by the foreign corporations was carried as inventory on the books of the foreign corporations.

            1.4After the transfer of the funds (REF _Ref250377514 \r \h  \* MERGEFORMAT 1.2 08D0C9EA79F9BACE118C8200AA004BA90B02000000080000000E0000005F005200650066003200350030003300370037003500310034000000 above), "A” and "B” established a holding company, held by them in equal parts, managed by them and engaged in investments in Eastern Europe ("Parent Company”).

            1.5Upon the organization of the Parent Company the balances of the investment of the Partnership in the subsidiaries were transferred to the Parent Company and booked by it as current assets.

            1.6The activities of the Parent Company and the Subsidiaries were based on the expertise and know-how of "A” and "B” in the real estate domain in which they have been active for decades.

            1.7The value of the real estate is today substantially lower than its cost.

            2.Question Posed

            The opinion tackles the possibility of the Partnership or the Parent Company to set off the loss resulting from the depreciation of the value of the real estate against Israeli sourced income. In this context it addresses the question of the character of the loss - business or other loss, its geographic source and to whom it appertains. The opinion also examines the exposure of the suggested modus operandi to counter contentions the Treasury could raise.


            3.1The opinion examined generally accepted accounting principles, which lead to the conclusion, that the reduction in value of the real estate should be recognized as a loss. The opinion concluded that the loss should be characterized as a business loss for purposes of the setting off of losses under the Income Tax Ordinance.


            3.2The opinion sets forth a strategy which in certain circumstances allows for the set off of the losses against Israeli sourced income of the Parent Company or the Partnership, by making use of certain provisions of the Ordinance enabling their pass through for tax purposes.

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