Can I move my shares in an Israeli company into a holding company without paying Israeli tax?

The plan is usually sensible and the timing is usually wrong. A foreign shareholder who has held 40% of an Israeli company for a decade decides to interpose a holding vehicle before a funding round, an inheritance plan or a partial exit, and assumes that because no money changes hands there is nothing for the Israel Tax Authority to tax. Israeli tax law does not work on cash movement. It works on disposals, and putting shares into a company is a disposal unless a specific relief catches it.

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Detailed Answer

That relief is Section 104A of the Income Tax Ordinance. It says that a person who transfers all their rights in an asset to a company in consideration for rights in that company is not charged tax on the transfer, subject to conditions that are strict and cumulative. The transferor must hold at least 90% of each of the rights in the receiving company for at least two years after the transfer date. The company must itself hold the transferred asset for at least two years. And the value of the rights allocated to the transferor, as a proportion of the whole company, must match the value of the asset transferred as a proportion of the company immediately afterwards, which is the proportionality test that trips up transfers into an existing vehicle with other assets already inside it. Section 104B extends the same logic to partners or co-owners moving a jointly held asset into a company formed for that purpose, requiring each participant's shareholding to mirror their former share of the asset for the same two years. Special conditions attach where the receiving company becomes a real estate association, including a construction requirement within four years. The relief is a deferral, not a forgiveness: your original cost base and holding period carry across, and the tax arrives when the shares are eventually sold.

The two-year lock-up is where non-residents get hurt, because their reasons for restructuring often sit inside that window. Section 104G(b)(2) provides that if a condition turns out not to have been met, the transfer becomes taxable, and the charge is computed at the greater of the original calculation or the transferred asset's market value on the day of the violation. A shareholder who reorganises in January and sells to a strategic buyer eighteen months later can therefore find the deferred gain crystallising at the higher, later valuation, which in a rising company is materially worse than simply paying the tax at the outset. On a NIS 10 million gain the deferred exposure at the 25% rate for an individual, or 30% for a substantial shareholder, is between NIS 2.5 and 3 million, and it moves with the valuation while it is deferred. There is a second, structural point that catches foreign owners: the Section 104 machinery is built around an Israeli receiving company, so a transfer intended to place Israeli shares under a Delaware, Luxembourg or Cypriot holding company is not a straightforward Section 104A case and is dealt with by an advance ruling from the Israel Tax Authority's rulings department rather than self-assessment. Where the eventual sale is what you are planning for, read this alongside our answer on capital gains tax when a foreign shareholder sells Israeli company shares, because the treaty exemption you may be relying on there can interact badly with a restructuring done first.

In Practice: Section 104A of the Income Tax Ordinance defers tax on a transfer of all rights in an asset to a company for shares, provided the transferor holds at least 90% of each right in that company for two years and the company holds the asset for two years, with a matching proportionality test. Section 104B covers partners and co-owners. Breach triggers Section 104G(b)(2), taxing the transfer at the higher of the original gain or market value on the day of the breach. On a NIS 10 million gain, that deferred exposure is NIS 2.5 to 3 million at 25%, or 30% for a substantial shareholder. Where a foreign holding company is on the receiving end, expect to need an advance ruling from the Israel Tax Authority, which realistically takes three to six months to obtain.

When to Consult a Lawyer

• A sale, funding round or exit is a realistic possibility within two years of the restructuring. The lock-up is unforgiving and the tax on breach is calculated on the later, higher value.
• The receiving company is not Israeli. Placing Israeli shares under a foreign holding vehicle falls outside routine Section 104A treatment and needs a ruling agreed before the documents are signed, not after.
• The company owns Israeli real estate, directly or through a subsidiary. It may be a real estate association, which brings the Real Estate Taxation Law and its own conditions into a transaction you thought was purely corporate.

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Speak With an Israeli Attorney

We model the deferral against your actual exit timetable, prepare the Section 104 documentation, and handle the Tax Authority ruling where a foreign holding company is involved.

Contact us for a confidential initial consultation.