What Is a FLIP

What Is a Corporate Flip

A corporate flip (Flip) is a change in the ownership structure of an Israeli company, in which a new foreign parent company is established above the Israeli company. The shareholders of the Israeli company exchange their holdings (usually by way of a share transfer and a parallel issuance), so that after completion of the process:

• The Israeli company becomes a subsidiary of the foreign company.
• The foreign company becomes the parent company of the group – and sometimes it is also the entity through which investments are made or transactions are executed.

In practice, quite a few Flips are carried out with a US parent company, but the choice of jurisdiction and structure is not a default. It depends on business, legal, and tax considerations.

It is important to emphasize: in most cases, a Flip is not a relocation of activity from Israel abroad. Rather, it is a change in the ownership layer and in how the group is presented externally.

Who a Flip May Suit (and Who It May Not)

A Flip is not “only for startups”. It may come up for a wide range of companies – the difference is usually in the trigger and the level of complexity.

Startups and Growth Companies

• Fundraising from foreign investors who prefer investing in a foreign entity.
• Preparation for a key target market (primarily the US).
• Standardization of investment documents and the employee share option plan (ESOP) structure.

Established Companies and Groups with International Activity

• Entry of a foreign strategic investor or establishment of a JV.
• Group reorganization: consolidation of global activity under a holding company.
• Preparation for an overseas IPO/merger or creating a “platform” for international acquisitions.
• More considerations relating to financing, corporate governance, risk management, and shareholder relations.

When Is It Less Suitable?

When there is no real business story, or when the company is at a stage where the process creates more friction than benefit (for example: a particularly complex ownership structure without a business need, or when the core activity remains in Israel and there is no genuine requirement for a change).

Why Do a Flip? Common Considerations

Alignment with Investor Requirements and International Standards

Whether it is an explicit requirement or not, there are markets where it is easier to invest, contract, and achieve exits through a foreign entity, due to familiar standards and commonly used documentation.

Access to the US Market and Ability to Execute Transactions

A Flip can make it easier to enter into commercial engagements, carry out acquisitions, and use corporate “language” that is understood by partners in the US.

Reorganizing the Group for Growth

For established companies, a Flip is sometimes part of a reorganization that enables management of assets, subsidiaries, and global operations under one roof.

Is a Flip a Tax Event in Israel?

A Flip typically involves an exchange/transfer of shareholder holdings: ownership of the Israeli company moves to the foreign parent company, and the shareholders receive shares in the parent. From a tax perspective, such an action may be treated as a sale transaction and create capital gains tax. However, there are also frameworks under Israeli law that, subject to certain conditions, allow a structural change to be carried out in a manner that permits tax deferral (for example, under the structural change provisions in the Income Tax Ordinance [New Version], including in contexts in which Section 104B is applied – depending on the relevant facts and conditions).

Key Points to Remember:

• Tax deferral is not an exemption. It is a deferral to a future date.
• Precision matters: shareholding percentages, types of rights, indirect consideration, and timing.
• For established companies, there are sometimes additional layers (prior investors, preferred shares, option/phantom arrangements, obligations) that increase the complexity of the review.

What the Law and the Authority Examine in Practice

What the law and the Israel Tax Authority examine in practice in a corporate flip (Flip) is mainly whether the process is consistent, well documented, and grounded in business logic. First and foremost, they assess whether the share exchange was carried out in a way that preserves the relationships among shareholders and their rights on a like-for-like basis, so that no quiet discrepancies are created. Examples include preference mechanisms, changes in rights, or minor adjustments that may be interpreted as a transfer of value.

In parallel, significant weight is given to valuation on the transaction date and the ability to explain exactly what was transferred and at what value, even if no cash was actually paid. Good documentation helps not only with the Israel Tax Authority, but also with investors, banks, and later on toward an exit. In addition, the business purpose is examined. The more the company can show that the move was intended to advance a clear business objective such as fundraising, an IPO, global operations, or the entry of a strategic investor, the easier it is to support it as a legitimate structure rather than a move with no real need.

Finally, the overall picture is measured by the quality of the evidentiary foundation: board resolutions, shareholder agreements, service/management agreements, IP agreements, investment drafts, material correspondence, and valuation documentation. A practical rule of thumb is that documents signed retroactively tend to weaken the explanation and raise more questions.

The Link to Transfer Pricing

After a Flip, a group is created with related parties (a foreign parent company and an Israeli company). In such a situation:

• Services between the companies (for example, development in Israel) must be priced at arm’s length.
• Use of intellectual property (license/royalties) requires proper documentation and appropriate pricing.
• Expense reimbursements, management fees, and cost allocations – all must be consistent and reasonable.

Therefore, even a company that is not huge needs to think about transfer pricing as part of the process, especially if the IP or profitability moves between entities within the group.

Key Risks

Tax Risk: An Unplanned Tax Event or Loss of Tax Deferral

Inaccurate implementation, or subsequent steps that shift rights and structure, may create exposure. Sometimes this happens specifically around fundraising rounds/issuances/changes in rights that take place after the Flip.

Civil/Corporate Risk: Shareholders, Rights, and Corporate Governance

In established companies there are sometimes layers of rights and historical agreements. A Flip without aligning and resetting documentation may lead to disputes, delays, or difficulties in future transactions.

Evidentiary/Reporting Risk: Missing Documentation and Unorganized Intercompany Agreements

Agreements that do not reflect reality, or documentation created retroactively, tend to raise questions. Creating order in advance reduces friction later.

Our Clients – Anonymous Client Stories

An Israeli company with international operations grew over the years and reached a turning point: the entry of a significant foreign investor. At that stage, the company approached us to examine whether and when it would be right to carry out a corporate flip and build a clear group structure with an overseas holding company, in line with the investor’s requirements and the business needs.

As part of the engagement, we carried out a legal and tax mapping of the existing structure. We identified historical layers of shareholder agreements and option grants from different periods, which required alignment before the structural change. We then led, together with the company’s teams, a process of corporate housekeeping, document adjustments, and organization of the intercompany agreement framework so that it would reflect the activity in practice (including relevant aspects of corporate governance and intercompany engagements).