Written by Ofir Levy and Ofir Paz
In March 2025, the Israeli Knesset approved the Economic Efficiency Bill for the Implementation of the Economic Policy for Fiscal Year 2025 (Legislative Amendments), 5785-2025. Among other provisions, the legislation introduces significant amendments to the Israeli Income Tax Ordinance in the area of corporate restructurings, introducing substantial reliefs for taxpayers.
General Overview of the Tax Reliefs
The restructuring provisions are set forth in Part E2 of the Ordinance. These provisions outline the conditions under which certain corporate restructurings—including mergers, asset transfers in exchange for shares, and corporate spin-offs—may be carried out on a tax-deferred basis. The recent amendments introduce, inter alia, the following key changes:
- Reduction of Shareholding Threshold for Tax-Deferred Mergers Involving Share Swaps- The required ownership threshold for a tax-deferred merger carried out through a share swap—where shares in the target company are exchanged for shares of the acquiring company—has been reduced from 80% to 70%.
- Easing of Size Ratio Requirements Based on Company Value and Shareholder Holdings- Section 103C, which governs size ratios between merging entities and their shareholders, has been amended to provide relief from one of its restrictive conditions. Specifically, a tax-deferred merger will now be permitted even when the total shareholder interests in each of the merging companies constitute at least 5% of the fair market value of the acquiring company’s equity and also when the relative size ratio between the companies does not exceed 1:19. Such merger, however, will require prior approval from the Israeli Tax Authority.
- Elimination of the Holding Period Requirement- The previous requirement mandating that shareholders maintain ownership of at least 25% of each class of equity in the relevant company for a minimum holding period following various types of restructurings, such as mergers, asset transfers to a company, and spin-offs, has been repealed.
- Increase in Permitted Cash Consideration in Mergers- The amendment eases the restriction on receiving cash consideration in mergers by increasing the maximum allowable cash component. Shareholders may now receive up to 49% of the total consideration in cash, up from the previous 40% limit.
- Clarifications on Tax Calculation for Shareholders in Merged Companies- New provisions have been added to clarify how tax liabilities are calculated for shareholders of companies that have merged with other companies.
- Elimination of Construction Requirement Following Real Estate Transfers to a Real Estate Association- Previously, when a restructuring involved transferring real estate to a company classified as a “real estate association” (Igud Mekarke’in), the company was required to complete construction on the property within five years from the restructuring. This condition has now been repealed.
- Easing of Size Ratio Limitation in Spin-Offs- In spin-off transactions, the permissible size ratio between the resulting entities has been significantly relaxed. The post-spin-off market value ratio between the companies may now be up to 1:9, an increase from the prior 1:4 limit.
Applicability of the Tax Reliefs
As a general rule, the above amendments will apply to restructurings (mergers, spin-offs, or asset-for-share transfers) executed on or after May 1, 2025. However, certain relief provisions will also apply retroactively to transactions completed before that date, subject to the following conditions:
- Elimination of the Holding Period Requirement – This relief will also apply to restructurings executed prior to May 1, 2025, provided that: a notice was submitted to the Israeli Tax Authority; the required holding period had not yet expired as of that date; and all other applicable pre-amendment conditions were satisfied.
- Elimination of the Construction Requirement for Real Estate Transfers – This relief will also apply to relevant transactions executed before May 1, 2025, provided that: the five-year period from the date of the real estate transfer had not yet elapsed as of May 1, 2025; and all other applicable conditions under the pre-amendment law were met.
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