A “new” term has entered our world in the past two year, which is becoming more common and is starring throughout the economic press.

So what, in effect, is an SPAC?

An SPAC (Special Purpose Acquisition Company), is a corporation, the entire objective of which is to raise money from investors, whilst determining a general definition pursuant to which the corporation’s objective is investment in companies in certain fields or in certain locations. In other words, when raising funds, there is no specific activity for which the funds are raised, but rather cash flows are raised and an issue is executed in reliance on the entrepreneurs’ reputation (“The sponsors”) and the investors’ trust in them, that they will select high quality target companies that will generate considerable value for the investors.

The advantage of this process for the target companies, companies that are interested in raising equity is that not only does it promote their interests, but they also save a significant part of the complex process involved in a “regular issue”.

Generally, a merger or an acquisition of the target company by the SPAC is done in one of two main ways, each of which has different tax implications or solutions and insofar as the shareholders in the target company and/or the target company and/or the shareholders in the SPAC are residents of Israel.

The first alternative:

A merger by way of the exchange of shares in the (Israeli) target company with shares in the SPAC, such that at the end of the process the SPAC will hold the entire share capital of the target company and the SPAC’s capital will be held by the original shareholders of the target company together with the shareholders in the SPAC. Of course, the cash flows from the issue through the SPAC will be directed to the target company as in investment in capital or in some other way, such as capital notes, loans and etcetera.

However, in some cases whether for tax considerations in Israel and/or in the United States, the structure of an American company’s holdings in an Israeli company may lead to tax liabilities in the United States, as a result of various anti-planning provisions, the implications of which need to be examined separately.

The second alternative:

Sometimes, because of commercial and/or legal considerations an alternative is selected within the context of which the target company will serve as the parent company, which is done by means of a reverse triangular merger. The target company will acquire all of the shares in the SPAC by establishing a new, wholly owned, subsidiary company which will merge with and into the SPAC, such that at the end of the process, the target company will hold all of the shares in the SPAC. The shareholders in the SPAC will receive new regular shares, which will be issued to them in the target company, in consideration for their shares in the SPAC.

We would mention that prima facie, if there are no Israeli shareholders in the SPAC, no tax event occurs in Israel.

The balance of the cash that is held in the SPAC will be transferred to the target company by means of a reduction in capital or by way of the self-purchase of shares.

Could a reduction in capital or a self-purchase be deemed to be a dividend?

A tax decision was published in 2020, which determines that a reduction in capital and a self-purchase in a SPAC company, as described in the second alternative, , insofar as there are no retained earnings in the SPAC, the transfer of monies from the subsidiary to the parent company by means of the reduction of capital or a self-purchase, will not be deemed to be a distribution of a dividend but rather a capital gain, which will not cause a tax liability (insofar as the consideration does not exceed the cost of the shares).

There are additional alternatives for the making of a structural change when recruiting funds through an SPAC. It is recommended that all of the alternatives be considered and that advice should be obtained before making a structural change.