In our client update of 23 November, 2017 (see here), we informed you about the new Israeli deemed distribution rules, which are set out under the newly enacted Section 3(i1) of the Israeli Income Tax Ordinance (the “Ordinance”). Under these rules, a loan from an Israeli company, which is granted to its 10 percent or more shareholder or affiliate and that is outstanding at the end of the year following the year in which it was granted, may be viewed as giving rise to a taxable distribution.

The Israel Tax Authority took an aggressive position in a published circular, under which the new rules were applicable to loans from an Israeli company to its non-Israeli parent company or affiliate. This view was contrary to the legislator’s intent to apply these rules to shareholders who are individuals (see our comment here). And indeed, an amendment to the Ordinance was recently enacted, which clarifies that the new rules do not apply to loans to corporate shareholders that are not fiscally transparent. This amendment is effective retroactively since 1 January, 2017.