|
|||
---|---|---|---|
Tax Alert No. 38
20.6.2021
International taxation - Self-purchase of shares from the perspective of international taxation, following the Hosen rulingIn November 2020, a court ruling was handed down in the Hosen House Ltd. case (hereinafter: “The Hosen ruling“).General backgroundThe self-purchase of shares (share buyback) is an economic transaction within the framework of which a company purchases shares that it has issued using retained earnings that are available to it, which is a transaction that has been permitted in Israel according to the legislation of the Companies Law.On the plain of tax laws, the question arises of whether a self-purchase has an identical tax result to the distribution of a dividend or should the sale of shares within the framework of a self-purchase be related to as if it were a taxable event in respect of which only capital gains tax should be imposed?The Tax Authority’s position and the position adopted in case law up to the Hosen rulingIn the past, the Tax Authority has published an income tax circular (hereinafter: “The circular“), which mentions the two previous court rulings (the Dan Bronavski and Bar Nir Tamar rulings), which determines across the board and without any connection to a claim of artificiality that, in both of the rulings, a self-purchase triggers dividend income for the remaining shareholders and sometimes also for the outgoing shareholders. According to the approach that was delineated in the Bronavski case (which will be discussed in this newsletter), the transaction is to be classified as a transaction comprising two stages:
The Hosen court rulingThis ruling deals with a self-purchase that is not pro-rata and determines that in a self-purchase transaction, only the selling shareholder will be taxed on a capital gain. The result is that there is no taxable event for the remaining shareholders, and they should not be seen as having received a (notional) dividend from the company whereas for the selling (outgoing) shareholder there is no reclassification of a self-purchase transaction from a capital gain to a notional dividend.The implications of the Hosen rulingWe will present the implications of the Hosen ruling (in which, as mentioned above, the situation of a notional dividend for the remaining shareholders is refuted) for the tax aspects that would apply in accordance with the “Bronavski approach”:
No tax event will occur for the remaining shareholders involving a notional dividend and therefore they are not to be charged with tax at a rate of 25% or 30% (for a substantive shareholder) or a lower rate where the issue involves individuals who are residents of a treaty country.For the selling shareholder, the full amount of the income will be classified as capital gain and not as a notional dividend, even though this might, in certain circumstances, increase the tax rate (according to a linear calculation, due to the fact that until 2003 the capital gain tax rate was taxed at the marginal tax rates up to 50%,) however in other circumstances, an exemption from tax may be granted to foreign residents pursuant to the Israeli Tax Ordinance or pursuant to a treaty.
No tax event involving a notional dividend will apply to the remaining shareholders and therefore they will not be charged with any tax. For the selling shareholder, the non-classification of the income as a notional dividend and leaving the full amount as capital gain may even afford a full exemption of the provisions of the Ordinance are met or pursuant to a treaty.
As mentioned above, no taxable event involving a notional dividend will apply to the remaining shareholders and they will not be charged with tax.In relation to the selling shareholder:
To summarize, the ruling reawakens the Tax Authority’s position in a self-purchase event. However, we would mention that this is a ruling by the District Court, it is reasonable to assume that the Tax Authority will appeal to the Supreme Court.Until there is a final ruling, it is expected that this issue will be the subject of uncertainty and we would recommend that each case be examined in depth and in accordance with the circumstances.Furthermore, we would mention that on all matters relating to a self-purchase by a foreign company, it is also necessary to examine the relevant company laws in that country that may affect the legal conclusion on the tax issue.
בכבוד רב,
|