Israel Holding Company

Participation Exemption

Dr. Avi Nov, Adv.

April 2009

In principal a “participation exemption” is an exemption granted in some countries (such as the Netherlands) to holding companies regarding dividend income and capital gains derived from affiliated investee companies, if certain conditions are met.

The principal aims are:

· Prevention of double taxation: an exemption can be a simple and effective alternative to a foreign tax credit

· Encourage multinational business-oriented concerns to establish a regional headquarters in the holding company country.

Israel tax law aims to foster the use of Israeli holding companies by foreign and Israeli investors, to hold investments in companies in other countries, near and far. 

Principal Conditions

To qualify for the Israeli participation exemption, various conditions must be met by the Israeli holding company and the foreign investee companies, as summarized below:

The Israeli holding company must satisfy various conditions including the following:

· The holding company must be incorporated in Israel and its business is controlled and managed in Israel only;

· The company must not formed pursuant to a tax-deferred reorganization

· An Israeli holding company election, signed by all its shareholders, must be submitted within 90 days after its incorporation.

· For 300 days or more in the year, commencing in the year after incorporation: (1) at least NIS 50 million must be invested in equity of, or loans to, the investee companies, and (2) at least 75% of the company’s assets must consist of such equity investments and loan balances;

The foreign investee company must satisfy various conditions including the following:

· Resident in a country that has a tax treaty with Israel;

· Or resident in a foreign country with a tax rate for business activity of at least 15% at the time the Israeli holding company invested in it (but there is no requirement that the investee company itself pay 15% tax if, for example, it obtains a tax holiday);

· At least 75% of its income in the tax year concerned is accrued or derived abroad is income from a business or one-time venture, excluding management fees from a related party, asset sale consideration and dividends from the income of related companies.

· The Israeli holding company holds an entitling shareholding “package” that confers at least 10% of the investee’s profits. The shareholding must span at least 12 continuous months before and/or after income is received. 

Benefits of the Participation Exemption

The following types of income will be exempt for an Israeli holding company:

· Capital gains from the sale of an “entitling shareholding” in an investee company;

· Dividends distributed during the 12 month minimum shareholding period from the entitling shareholding “package” in an investee company;

· Interest, dividends and capital gains from securities traded on the Tel-Aviv Stock Exchange;

· Interest and indexation amounts received from an Israeli financial institution.

In addition, dividends paid by an Israeli holding company to foreign resident shareholders will be subject to 5% dividend withholding tax only when paid. However, profits paid or distributable at the year-end by an Israeli holding company to Israeli resident to Israeli resident shareholders will be taxable to them as dividend income in that year, whether or not they are actually distributed by the Israeli holding company.

Regular Israeli CFC rules aimed at tax haven companies owned by Israeli residents will not apply under the Israeli holding company regime. Therefore, profits may be retained and reinvested abroad.