Tax Update

 New Tax Circular 15/2018 Regarding Change in Business Structure in Multinationals

On November 1, 2018, the Israel Tax Authority (the “ITA”) published the Income Tax Circular number: 15/2018, on the topic of: “Change in Business Structure in Multi-National Groups” (the “Circular”).

The Circular discusses modifications to a business structure and/or activity of Israeli companies that are a part of multi-national groups. In the framework of the Circular, the ITA referred to certain identifying characteristics of a “silent business structure modification”, which entails  the transfer or even liquidation of functions, assets, or risks (collectively “FAR”) and the potential profit latent within them.

According to the position of the ITA, a structure modification could occur through various actions such as the transfer of activity, information, employees, the assignment of contracts, or the termination and incorporation of affiliate companies and more.

The ITA based its position, inter alia, by reference to the ruling of the honorable judge, Dr. S. Bornstein in the case of Jetco[1], and the OECD guidelines regarding transfer prices.

Pursuant to the position of the ITA, as reflected in the Circular, the process of identifying a modification to  a business structure starts with a functional analysis. For this purpose, it is important to characterize the company’s activity prior to and following the change in structure. In addition, it is important to identify, amongst others, the existing functionaries of the company, the risks borne by the company and the assets of the company, etc. For example, the modification of a business structure can occur from a legal perspective, for example by transferring ownership of certain assets, or from an economic and substantial prospective, without the occurrence of any legal change.

We would like to bring to your attention the following number of characteristics of a modification to a company’s business structure, subject to a substantive analysis of the relevant circumstances:

• The transfer of a number of employees between companies within a group of companies.

• The assignment of debts or assets to another company within a group of companies.

• A change in the registration of ownership of assets.

• The altering of intercompany pricing mechanisms.

• The transfer of intangible assets.

• An Asset purchase/licensing.

• Related party transactions.

• Remodeling of ownership structures.

• A substantial change to income turnover.

• A change in cash flow.

The identification of a modification to a business structure can also be derived from the facts, as the case may be, and the parties’ conduct and/or behavior.

According to the provisions of the Circular and the case  of Jetco, where the Assessment Tax Officer believes that the substance of a transaction differs from the way it was presented to him and that the price per share of the transaction, which shall be determined according to the transfer pricing principles of the FAR, is different than it was presented to him, the burden of proof is on the taxpayer to prove that the transaction is as it was presented.

For further information, you are welcome to contact Adv. Oren Biran, Partner, and Head of the GKH Tax Department, at +972-3-607-4547 or via email: and/or other advocates from the GKH Tax Department.

Gross, Kleinhendler, Hodak, Halevy, Greenberg, Shenhav & Co. (GKH), is one of the leading law firms in Israel, with over 150 attorneys. GKH specializes, both in Israel and abroad, in various fields of law including Mergers and Acquisitions, Tax, Capital Markets, Technology, Real Estate, Banking, Project Finance, Litigation, Antitrust, Energy and Infrastructure, Environmental Law, Intellectual Property and Labor Law.
This alert is prepared as an informational service to clients and colleagues of Gross, Kleinhendler, Hodak, Halevy, Greenberg, Shenhav & Co. (GKH) and the information presented is not intended to provide legal opinions or advice. Readers should seek professional legal advice regarding the matters about which they are particularly concerned.

[1] TA (TA) 49444-01-13 Jetco Ltd. v. Kfar Saba Tax Assessment Officer

Oren Biran

Phone +972-3-6074547

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