Your taxes: No more blowin' in the wind

June 20, 2019 22:43
3 minute read.

Shekel money bills. (photo credit: REUTERS)


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Until recently, if you asked how many milestones can a man walk past before paying Israeli tax, the answer, to quote Bob Dylan, was blowin’ in the wind.

Fortunately, the Israeli Tax Authority (ITA) has issued a circular providing some relief from immediate tax on deferred payment for shares in a company (Tax Circular 19/2018). This is important for companies and their investors planning an exit. Often the price paid in an M&A deal is contingent on reaching sales targets, R&D stages or other important milestones.

What’s the problem?

Israeli tax law does not recognize installment sales, unlike the United States and other countries. When a capital gain transaction occurs, the seller must report the transaction and pay the tax within 30 days after signing the sale agreement, even if they haven’t received full payment. And the purchaser, Israeli or foreign, must withhold tax – typically at rates of 25% to 30% – from the stated sale consideration even if it hasn’t yet all been paid. The problem is even greater if the amount of consideration is not yet known because it is contingent on targets or milestones, e.g., sales or R&D milestones. The new circular stretches the existing law without troubling the Knesset, while carving out a role for the ITA.

Future known sale consideration

The circular splits future consideration of a known amount into two for Israeli tax purposes: 1) loan interest and 2) asset sale price. But there is “tendency” to do so only if the last installment is paid at least two years after the sale date. The interest rate should be arm’s length, and prescribed rates under imputed interest rules may be used.

Known consideration placed in escrow

The circular again splits known consideration between interest and asset sale price. The interest rate is that agreed between the parties. The asset sale price is reportable within 30 days and if the tax isn’t paid then, interest is added to the unpaid tax at the rate of inflation in Israel plus 4% per year.

Known consideration denominated and paid in foreign currency such as dollars: When reporting the sale within 30 days, permission may be obtained from the ITA to use the shekel exchange rate when future (not past) payment is actually received to calculate the consideration and resulting capital gain. The taxpayer cannot later change his mind.

Contingent consideration

The circular lets sellers apply to the ITA for approval to use an “alternative reporting track.” This means requesting to defer the Israeli taxation of contingent consideration when reporting a capital gain transaction within 30 days.

This track is not possible in the following cases: When the deal itself (not the consideration) is contingent on regulatory approval; when the consideration is dependent on a condition likely to be met; when merely the mode of payment is uncertain; in kind consideration; fixed consideration not dependent on anything, just the timing of the payment is uncertain; when a reliable estimate of the consideration is possible; or if the consideration is known but placed in escrow.

If use of the alternative reporting track is approved, the sale consideration is not recognized and taxed until the earlier of: 1) actual payment, or 2) the consideration becomes certain. The depreciated cost is utilized straight away, not later on.

Tax rates, and pro rata calculations (e.g. for olim after their 10-year tax holiday expires) relate to tax arising when the sale consideration is recognized and taxed. But capital losses can only be offset against remaining taxable gains in the year of the transaction.

Withholding tax

Payers who do not use an escrow agent withhold tax from contingent consideration on a cash basis. Trustees (escrow agents) do so too, but via the withholding tax file of the trustee. 


The above procedures apparently only apply to sales of shares not other assets, e.g., intellectual property, real estate. It is to be hoped the ITA will relent in this regard.

The above procedures usually mean that ITA approval is needed before an M&A deal can proceed. How do you speed up the process? The “Shaam” online system for accountants or physical visits to the ITA may expedite things more than emails and phone calls.

Purchasers should also check how to structure the deal to optimize present and future taxes, now that the sellers are less constrained. No more blowin’ in the wind.

As always, consult experienced tax advisers in each country at an early stage in specific cases.

The writer is a certified public accountant and tax specialist at Harris Horoviz Consulting & Tax Ltd.

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