Merger of Companies According to Section 103 of the Ordinance

Pick & Weiss Legal Offices
September 3, 2012
January 9, 2019

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).

Benefits according to the Mergers and Demergers Chapter

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:

  1. Selling rights in a transferring company within a merger, and transferring the assets or liabilities of a transferring company to a receiving company while merging will not be taxable in accordance with the Ordinance, the Adjustments due to Inflation Law and the Land Betterment Tax Law, unless the designation of the transferred asset changes – from a capital asset to trading stock or vice versa. Let it be stated that this is not an absolute exemption from tax payment due to the said profit, but their receiver will sell a tax deferment until the assets within the merger.
  2. Whenever the sale is not taxable under the betterment tax, the sales will be taxable under the purchase tax at a decreased rate of 0.5% of its value (despite the regular purchase tax rates that are higher).

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:

  1. The structural change is for a business and financial goal.
  2. Tax avoidance or undue tax reduction is not among the main goals of the structural change.
  3. Most assets transferred to the receiving company within the merger by each of the transferring companies and most assets it possessed of before the merger were not sold in the “required period.”

The “required period” is the longest of the following:

  1. Two years of the date of the merger.
  2. From the date of the merger, and until the end of the year after the end of the tax year in which the court gave the merger order or merger permission.
  3. The main financial activity each of the merging companies had before the merger continues in the receiving company over the required period.
  4. Merger in consideration for allocation of shares only, according to the relative part of the shareholders in the merging companies. Meaning, they were not given any other consideration (whether directly or indirectly) by the receiving company or by any other person.
  5. Meeting value ratios:
  6. The rights in the receiving company will be divided according to the rights in the company, in accordance with their relative part that will be determined according to the market value of the transferring and receiving companies.
  7. The total rights of all right holders in each of the companies participating in the merger in the required company does not decease below 10% of the market value of the rights in the receiving company, in the required period.
  8. At the time of the merger, the market value of each of the merging companies shall not exceed four times the market value of the other company participating in the merger.
  9. Rights holders in the companies participating in the merger must hold all rights in the receiving company, with no change to the ratios of rights amongst them, immediately after the merger and in the required period (see definition above).

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:

  1. Voluntary sale of less than 10% to a person who did not own rights before the merger by one or more of the rights holders in the merging companies.
  2. Private issuance – allocation of new shares, up to 25%, to a person who did not have rights before the merger.
  3. Public issuance.
  4. Involuntary sale of rights.
  5. Voluntary sale of all the rights in consideration for cash (within one year of the merger date).
  6. In the required period, the designation of the assets transferred within the merger may not be changed, for example transferring stock to fixed assets and vice versa. A change such as this may be taxable.

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 Conclusion

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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