The Knesset Finance Committee approved a draft bill for second and third readings to ease the conditions for tax relief during corporate restructuring. The bill was first published in the initial draft bill within the tax section of the Arrangements Law for 2025, in order to assist the high-tech sector, and which was split from the original bill.
Part 5B of the Income Tax Ordinance regulates companies’ ability to carry out organizational restructuring, without having to pay tax on the capital gain already accumulated at the time of the restructuring, by deferring the tax until the future exercise date. The provisions address various types of restructuring and include conditions designed to limit restructuring procedures, ensuring that the tax is ultimately collected in Israel when the shares are realized. These conditions also prevent companies from exploiting the law’s provisions to avoid tax liability.
The draft bill seeks to reduce or eliminate some of these conditions to enhance flexibility for companies and facilitate corporate changes – necessary for expanding operations, bringing in investors, and improving strategic agility.
Key Changes Proposed in the Draft Bill
In relation to all types of restructuring
The current conditions prescribe that subsequent to the restructuring, the participating shareholders will be obligated (in order to be eligible to defer the tax) to continue holding at least 25% of the shares of the restructured company for two years after the restructuring. The draft bill now proposes to eliminate this condition altogether, since the shareholders’ commitment to hold the shares during the required period caused a negative incentive for restructuring.
Mergers
- The current conditions regarding mergers carried out by way of exchanging shares specify that the tax deferral will apply only if at least 80% of the shares of the transferred company are exchanged for shares of the surviving company. The draft bill now proposes to reduce this restrictive condition to 70%.
- The current version of the law contains a condition relating to the market-value ratios between the merging companies. This condition prescribes that the tax benefit will be allowed only when the market-value ratios do not exceed 9 times, and the total rights of the owners of the smaller company are at least 10% of the market value of the rights in the surviving company subsequent to the merger. The draft bill now proposes to change the condition so that the market-value ratios do not exceed 19 times , and the rights of the smaller company’s’ shareholders is at least 5% of the rights in the surviving company – subject to a special approval, preventing such transactions that made solely for tax purposes and without economic logic.
- According to an amendment that has been made pursuant to the committee’s deliberations, the condition, states that transferor shareholders may receive up to 40% of the consideration in cash as part of a merger, will change, so that the shareholders will be able to receive in cash up to 49% of the total consideration, without it constituting a violation of the terms of the merger (of course, the cash portion will not benefit from a tax deferral, however the consideration received in shares will still be entitled to the tax deferral even though part of the consideration is received in cash).
Those changes expand the scope of Part 5B and allow additional cases in which companies will be able to merge while benefitting from a tax deferral.
Splits and asset transfers
- The current law requires that when real estate assets are spun off from a company to a real estate association as part of a restructuring, construction must be completed within five years to qualify for tax deferral. This restriction has created pressure to finalize projects within a limited timeframe. The draft bill removes this condition, granting companies more flexibility, and allowing a broder usage of real estate transfers procedure.
Implications of the Proposed Changes
The proposed amendments expand the scope of Part 5B of the Income Tax Ordinance, enabling more companies to undergo restructuring while deferring tax liabilities. By eliminating or modifying restrictive conditions, the bill aims to facilitate transactions that are crucial for business growth, investor participation, and operational expansion.
This is welcome news for many companies in Israel, especially in the high-tech sector, as it provides much-needed relief and flexibility in corporate structuring. The amendments reflect an understanding by both the Israel Tax Authority and the legislature of the market’s evolving needs, particularly in enabling transactions that are economically sound and necessary in today’s business climate.
As the draft bill progresses through the legislative process, and subject to its final approval by the Knesset, we recommend that companies reassess their restructuring feasibility in light of these more flexible provisions. It is important to note that while this summary outlines the key proposed changes, additional modifications may arise as the legislative process continues.
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