Mergers and acquisitions allow two or more companies to merge business activities by consolidating all the assets and liabilities of each of the companies.
Types of Mergers:
A merger of companies is defined as the transfer of all the assets and liabilities of a company or several companies to another company which results in the liquidation of the transferring company. The shareholders of the liquidating company are allotted shares of the receiving company. Under certain conditions, even the transfer of 80% of the rights of the transferred company will be considered as a merger.
Split – Transferring assets and liabilities of a company to a separate company or to several other companies. Mergers and splits are tax events under section 88 of the Tax Ordinance.
At the same time, Amendment 242 to the Income Tax Ordinance made changes to the sections of the ordinance that regulate the conditions under which structural changes in companies will not be taxed.
Among other things: the restrictions for offsetting losses were reduced, the need to obtain prior approval from the Director of the Tax Authority when merging companies by way of a share exchange was eliminated, and the possibilities for transferring property by partnership or joint ownership of the property was expanded.
In the following cases, the sale of rights in a transferring company and the transfer of the company's assets to a receiving company by way of a merger will not be taxed:
- The company is not a real estate association
- A company merger is not done for tax purposes
- Most of the assets transferred to the acquiring company from each of the transferring companies and most of the assets that were in its possession on the eve of the merger were not sold in the longer of the following periods:
- A period of two years beginning on the date of the merger
- A period beginning at the date of the merger and ending one year after the end of the tax year in which the merger order was issued, or the merger was approved, as the case may be. (Hereinafter: “the required period”)
- In the acquiring company, the main economic activity, which was in each of the merging companies on the eve of the merger, continues for the required period
- During a merger of companies, the acquiring company has allocated equal rights to all the rights holders in the transferring company in accordance with their relative share in all the rights in the transferring company. Also no further consideration was given during the merger
- The total rights of all the rights holders in each of the companies participating in the merger, on the date of the merger, will constitute at least 10% of the market value of the rights in the acquiring company on the said date
- The market value of each of the companies participating in the merger will not exceed nine times the market value of another company participating in the merger, all on the date of the merger
- The receiving company is a resident of Israel or has received specific approval in the matter
- The documents and reports to be submitted have been submitted
- All rights holders in the companies participating in the merger hold together, immediately after the merger, the full rights in the acquiring company. Also, during the required period, the total rights held by the said right holders, in whole or in part, shall not be less than 25% of any of the rights in the acquiring company
Mild changes recently made in Amendment 242
• Expanding the possibility for investors to enter
Amendment 242 expands the possibilities for investors to enter and/or sell shares during the period of restrictions, including in exchange for cash. This is considering that during the period of the restrictions the privileges of the rights holders will not be reduced, on the eve of the change of the structure from 25%. It is possible that some of the rights holders will sell the full rights held by them, provided that other right holders, than those who were before the change of structure as stated above, will continue to hold at least 25%.
• Extending the applicability of the period required for restrictions:
After the amendment, the required period of two years from the date of the change also applies to transfers of assets and splits, in addition to mergers. In a merger between a subsidiary and a parent company that holds the full rights in the subsidiary, there are no restrictions at all.
• Sale of rights by an existing shareholder (with the assistance of an accountant for mergers and acquisitions)
After changing the structure an existing shareholder may sell up to 75% of the rights in the company.
• Merger by way of share exchange
Section 103C of the Ordinance sets forth provisions regarding a merger by way of an exchange of shares. Prior to the amendment, the conditions under which such a merger will not be taxed were determined. For example, it is required, among other things, that the acquiring company holds, immediately after the merger and for the required period, all the rights in the transferred company that it held at the time of the merger. A request was also submitted to the Director to approve the merger plan. As part of the amendment, the acquiring company will be required to hold immediately after the merger all the rights in the transferred company transferred to it. However, during the required period, it will be possible to reduce (by allocating rights or selling rights) up to a rare of 51%- that is allocating up to 49% of each of the rights in the transferred company. It is only that the total rights of the shareholders in the acquiring company will not be less than 25% of any of the rights in the aquiring company.
• The merger of a parent company and a wholly owned subsidiary
In merger between a subsidiary and a parent company that holds all the rights in the subsidiary, there are no restrictions. There will be no dilution restrictions on the allotment of shares, nor will there be a limit on offsetting losses. There will be no restriction on the use of the parent company’s losses if the size ratio- market value- at the time of the merger, between the parent company and the subsidiary exceeds 9:1.
• Cancellation of the requirement for prior approval by the Director
Cancellation of the requirement for prior approval by the Director in certain cases and a requirement to submit reports to the Assessing Officer. Among other things, the requirement for prior approval in the event of a merger by way of an exchange of shares to the Ordinance was abolished. Also in a split into which all the full rights are held by the splitting company. In these cases, it is possible to be satisfied with a report to the Assessing Officer within 30 days from the date of the change of structure as stated in section 103I of the Ordinance. There is still a requirement for approval of a split for a new sister company- a horizontal split.
• Offsetting Losses
The restrictions applicable to offsetting losses following a statutory merger have been reduced in some cases, and the restrictions on offsetting losses applicable after a split have been eliminated.
• Corporate Attitude Requirement
The ratio of value between the merging companies will be determined according to the value at the time of the merger only (and not during the entire period of restrictions). The requirement for a market value ratio between the merging companies not to exceed 1:4 was also changed to a ratio not to exceed 1:9.
• Payment of part of the consideration in cash in the merger
In order to facilitate mergers for which a partial cash consideration is a necessary component, after the repair a cash consideration can be paid in an amount not to exceed 40% of the total consideration. This is subject to the prior approval of the director and additional conditions that aim to ensure that this is not a realization transaction. The cash component will be fully taxed at the time of the merger.
• Another structural change
Facilitate further structural changes during the limitation period. The amendment stipulates that it will be possible to make another structural change during the limitation period. If the change in the additional structure is intended for a business and economic purposes, tax avoidance or improper tax reduction are not the main objective of the transaction. For this purpose, the prior approval of the director must be given.
In the 2018 circular, the Tax Authority issued instructions regarding the possibility of merging at the end of each quarter and not only at the end of the tax year.
