• Income Taxation
    • International Taxation
      • Real Estate Taxation
        • VAT
          • Trusts

            Tax Aspects upon Realizing Accumulated Earnings (September 14th, 2009)

            1.Factual Background

            1.1"A”is a corporation established in 1975, the shares of which are held by an individual ("B”). "A” has accumulated earnings as defined in section 94B of the Israeli Income Tax Ordinance, accumulated prior to January 1st, 2003 (the "Effective Date”).

            1.2"C”corporation was established in 1974 and its shares are held by "A” and "D”, who is married to "B”. "C” has accumulated earnings prior to the Effective Date.

            1.3The shares of "A” were held until 1989 by "B” at which point she transferred some of them to her children. During the course of 2000 all the shares of "A” and "C” were transferred to the children of "B” and "D”. The shares of "C” were returned to the transferors before the Effective Date but the shares of "A” were returned to "B” in 2006, subsequent to the Effective Date. All transfers were gifts and exempt from capital gains tax (section 97(a)(5) of the Income Tax Ordinance).

            1.4On March 15th, 2006, "A”loaned "E”, the son of "B” and "D” money ("the Loan”), which he repays in accordance with the loan agreement entered into with respect thereto. The Loan bears interest and linkage differentials as per section 3(i) of the Ordinance.

            2.Question Posed

            What are the tax consequences of the distribution of earnings which were accumulated in "A” and "C” prior to the Effective Date?


            3.1A special provision was added to section 125B of the Ordinance with applicability during the years 2009-2010 ("Temporary Measure”). It allows, in certain circumstances, a tax benefit on earnings accumulated prior to the Effective Date without resort to a sale of shares (or a liquidation), which carry with them a 10% tax on such accumulated earnings.

            3.2The reduced rate on such accumulated earnings applies only to their distribution on shares acquired prior to the Effective Date.

            3.3The date of the purchase of the shares owned by "B” and "D” will be the date on which they were last transferred in a taxable transaction and in the case under consideration prior to the Effective Date.

            3.4Liquidation or intra family sales designed to enjoy the 10% tax on accumulated qualified earnings might be attacked as unlawful tax avoidance, or bring about a revaluation of the consideration paid.

            3.5The opinion recommended making use of the Temporary Measure Thus, "B” and "D” will enjoy a 12% tax (in lieu of the 25% tax) on the dividend distributed from earnings accumulated prior to the Effective Date. The shares of "C” are held in part by "A” a corporation and therefore at first blush not entitled to the tax benefit of the Temporary Measure. The opinion recommended a measure designed to enable "A” to nevertheless avail itself of the 12% reduced rate.

            A.Rafael & co | Law Office |  © 2010