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
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
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.
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
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
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.