ISRAEL Law and Practice Contributed by: Benjamin (Benny) Sheffer and Lance Blumenthal, S. Horowitz & Co.
infrastructure deals where regulatory approvals or project commissions determine value. Regulatory and licensing • In energy/infrastructure ventures, exit value often depends on successful licences, government approvals and regulatory changes. Accordingly, the company should be structurally ready for sale, hav- ing obtained clear permits. • Due diligence on regulatory risk should be fully undertaken and completed prior to exit. • Exit may be delayed or value reduced if licensing is incomplete or contingent obligations remain. Tax and cross‐border issues • Founders and investors must consider Israeli tax implications on exit (such as capital gains tax, withholding, repatriation of proceeds). • If the company or holding company is foreign, cross‐border tax treaties, withholding, currency conversion and exit structure become significantly more important. • Secondary sales may trigger complex tax implica- tions for founders and employees (especially if members have foreign residences or relocation is required). • Equity plans for employees should anticipate exit: vesting, tax timing, and potential local, as opposed to foreign, tax exposure. Spin-offs are not common in Israel’s energy and infra- structure market. These deals can be expensive and legally complex, and they may involve many regula- tory approvals. Still, companies sometimes use spin- offs when they want to change strategy or focus on core activities. In Israel, major energy and infrastructure groups are more likely to restructure by selling assets, forming joint ventures or attracting new investors into specific projects. That said, spin-offs do occur when there are strong business reasons. 3. Spin-Offs 3.1 Trends: Spin-Offs
Common reasons to consider a spin-off in Israel include: • focusing the business on main activities (for exam- ple, renewable energy or transport infrastructure); • responding to regulatory requirements (such as separation between electricity transmission, distri- bution and supply); • helping investors better understand the value of specific assets; • raising financing for new growth and innovation; • preparing the business for a future merger or sale; and • simplifying financial and risk structures. 3.2 Tax Consequences Israeli spin-offs are usually planned so that they do not create unexpected tax liabilities. Israel’s tax rules allow for tax-neutral reorganisations if certain con- ditions are met. These rules are mainly found in the Income Tax Ordinance, which deals with company splits and asset transfers. To qualify for tax relief, the transaction must follow strict requirements, such as: • having a real commercial purpose which is not only tax savings; • keeping the same shareholders in the separated businesses for a required period; and • avoiding cash or other non-qualifying assets being transferred as part of the split. If these conditions are not met, the spin-off could trig- ger taxes for both the company and its shareholders. 3.3 Spin-Off Followed by a Business Combination A spin-off can be followed by a merger or sale in Israel, but this may make the completion thereof more com- plicated. Regulators are likely to scrutinise the spin-off in order to ensure that the separation was not done only to avoid taxes. In order to avoid unnecessary scrutiny in such cir- cumstances:
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