Lior Pick, Adv. (CPA) and Anna Liskenich, Adv.
In August 1993, the Knesset approved amendment no. 94 to the Income Tax Ordinance (New Version) 5721-1961 (hereinafter: “the Ordinance“), referred to as “the Mergers and Demergers Law” (hereinafter: “the Mergers and Demergers Chapter“). Within the amendment to the Income Tax Ordinance, part E2 was added, including three main chapters dealing with structural changes in companies, among whom the second chapter on companies and cooperatives societies mergers (section 103).
In December 2000, due to the legislation of the Companies Law in 1999, and in light of the changes in the Israeli and Global markets, the provisions of part E2 were amended in amendment 123 to the Income Tax Ordinance (hereinafter: “the Amendment“) and adjusted to the new reality. Among other things, the Amendment dealt with expanding the options of structural changes and reliefs in the terms of part E2, determining unique provisions for the merger by way of exchange of shares (section 103T), clarifying the provisions of the existing law and “technical amendments” relating to procedural aspects of the law. A special taxation arrangement in shares sales deals was added. This happens when the paid consideration is in the shares of a company whose shares are traded in the stock exchange (section 104.8).
The Mergers and Demergers Chapter’s goal is to create convenient conditions for structural changes that will result in the optimization of the participating entities in the process and contribute to the market’s economic growth. To realize this goal, the following tax reliefs were stated in the Ordinance:
Conditions for Qualifying for Benefits following the Mergers and Demergers Chapter
As said, to benefit from the exemptions stated in the Mergers and Demergers Chapter, the merging companies must meet all of the cumulative conditions as follows:
The “required period” is the longest of the following:
Despite of that said, in the following circumstances, change in ownership of rights will be allowed without prejudice to the benefits, provided only that over the required period, the rights of parties who owned rights in the participating companies shall not decrease below 51% of the rights in the receiving company:
In general, a merger in accordance with section 103C does not require obtaining a pre-ruling from the income tax commissioner. However, in light of the complexity of the merger and the tax problems it entails, it is advisable to appeal in advance and receive preliminary permission from the income tax commissioner.
In the changing financial reality and the increase of international activity and globalization processes, often there is need to carry out a succession of mergers, within which a company that participated in a previous merger can perform an additional merger during the required period, provided that the conditions stated in the mergers chapter have been fulfilled. Also, the Ordinance enables merger by way of exchange of shares, whereas the transferring company remains intact and is not liquidated. These subjects were not reviewed in the present article.
From our experience, the main reasons why mergers fail is lack of planning, failed negotiations, managerial-organizational culture differences, and difficulties in the strategic implementation due to choosing the wrong integration process. Hence, the merger process should be planned meticulously and systematic in analyzing information and assessing problems and risks. In addition, it is crucial to choose experienced legal counselors who will know how to take legal actions for the merger’s success.
Our firm has a lot of experience in mergers/acquisitions, negotiations during the merger and evaluating due diligence within it. Also, our firm provides extensive tax counseling in mergers/acquisitions deals, introduction of partners, allocation of shares and structural changes.
The above said may not be seen as a recommendation and/or an opinion, and in any case, it is advisable to receive individual professional counseling in accordance with the concrete circumstances of each individual case.
Lior Pick and Co., Law Offices
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