On August 6, 2017, long-awaited legislation was finally published.  This legislation relaxes many restrictive limitations previously imposed by the Israeli tax-free reorganization law (the “Reform”). The Reform expands the availability of corporate Israeli tax-free reorganizations, such as mergers, divisions, stock-for-stock exchanges, and other forms of intra-group asset transfers.   The Reform opens various possibilities for simplification of multi-national structures involving a number of Israeli subsidiaries that were previously impossible.  It also expands the availability of new corporate acquisition transaction structures, where the consideration is paid, in full or in part, in shares of the acquiring company.   A major motivation of this Reform was to support the Israeli hi-tech industry by removing regulatory impediments on investments in these companies and limitations on business restructurings.   We provide below a general summary of certain key amendments as reflected in the Reform:  
  1. Relief in the Post-Reorganization Continuity of Interest Requirement – Under Israeli law, there is a minimum level of continuity of interest in the companies that underwent a tax-free reorganization by the original pre-reorganization shareholders during the limitation period (very generally, two years). The minimum continuity of interest requirement is now 25% instead of generally 51% (or 50%) under the prior law.  Furthermore, in some cases, the Reform removes this requirement altogether, for example in parent-subsidiary mergers or intra-group asset transfers to certain R&D companies. 
  2. Cash Consideration- the Reform permits cash consideration in tax-free mergers, so long as the cash consideration does not exceed 40% of the total consideration. While the cash consideration will be subject to tax, the consideration in shares will benefit from the tax-deferral.
  3. Value of the Merging Companies- pursuant to the Reform, the value of one of the merging companies may not be more than 9 times the value of any other company taking part in the merger, as opposed to generally 4 times the value, which used to be the case prior to the Reform.
  4. Additional Reorganization- the Reform permits companies that underwent a reorganization to carry out an additional reorganization during the limitation period in certain circumstances, provided that an ITA approval is obtained and several conditions are met.
  5. Relief of pre-ruling application- certain forms of reorganization, which previously required a pre-ruling application (which could be an extended process) now merely require providing a notice to the Israel Tax Authority ("ITA") within 30 days of the reorganization (for example, a stock-for-stock exchange).
  6. Limitation on Losses- the Reform provides relief with regard to the utilization of losses in certain cases; although it also includes several new limitations in this regard. Under the Reform, the limitations applicable to offsetting losses do not apply in the case of parent-subsidiary mergers, if the parent company's market value exceeds nine times the market value of the subsidiary. In addition, loss offset limitations are no longer applicable with regard to corporate divisions.
  7. Transfer of Assets Owned by Partners or by a Partnership- the Reform expands the applicable tax benefits with regard to the transfer of an asset by partners in a partnership or by a partnership to an existing company, as opposed to the former law, which required that the asset be transferred to a newly formed company.
In general, the reform applies from August 6, 2017 onwards; however, several provisions of the Reform may also apply with regard to reorganizations that took place prior to the enactment of the legislation.