Income Tax Ordinance [New Version]

"accumulated profits" — the total taxable income of the company, plus income exempt from tax, including appreciation as its meaning in section 6 of the Land Taxation Law, which have accumulated from the date of its incorporation until the end of the particular tax year, less the tax applicable to it and less any dividend that it distributed by the end of the particular tax year and less any loss incurred in the company that has not been offset, provided that the amount of profits shall not exceed the amount of profits as defined in section 302(b) of the Companies Law plus capitalised profits; however, with respect to a company that has rights in a transparent corporation — provided that the amount of profits shall not exceed the amount of profits as defined in section 302(b) of the Companies Law plus capitalised profits plus the profits of the transparent corporation, to the extent that they were not included within the amount of profits as defined in section 302(b) of the Companies Law; for this purpose —

"profits of the transparent corporation" — an amount equal to the share of profits of a transparent corporation attributed to the company, which accumulated in the transparent corporation and were not distributed by the end of the tax year, less the tax applicable thereto;

"transparent corporation" — a body of persons in which the closely held company has rights at the end of the tax year and whose profits and losses are attributed to the holders of rights therein;

"its profits for a particular tax year" — accumulated profits at the end of the particular tax year less accumulated profits at the end of the tax year preceding it plus dividends distributed in the particular tax year.

A deemed dividend from a particular closely held company (hereinafter — the first company) to a shareholder who is also a closely held company (hereinafter — the second company) — shall not be liable to tax as income of the second company, but shall be treated as if the second company had distributed it as a dividend on the date determined by the Director under section 77, and accordingly the shareholders of the second company shall be assessed or their assessments shall be amended; and if a shareholder of the second company is also a closely held company — the provisions of this section shall apply, with the necessary modifications, to the deemed dividend, as if all references to the first company referred to the second company and all references to the second company referred to that shareholder, and so on, according to the same principle, until no part of the undistributed profits in respect of which the Director's instructions were given and which are to be treated as if distributed to a closely held company remains.

A person who has been assessed for tax, or whose assessment has been amended, pursuant to the provisions of sections 77 or 78 and who has not paid on time the tax, in whole or in part, attributable to their share in the deemed dividend — the amount unpaid shall be a debt due to the Government from the company which, by reason of its failure to distribute the profits, gave rise to the Director's instruction under section 77, and shall be recovered as a debt.

Undistributed profits liable to tax under sections 77 and 78 that are subsequently distributed shall not be treated as taxable income of the recipient of the profits.

A committee of five, including at least three who are not State employees, shall advise the Director regarding the exercise of the power conferred upon him in this Chapter; the committee shall be selected by the Director when the need arises from a list to be drawn up by the Minister of Finance by notice published in Reshumot (Official Gazette).

In this Section –

"loan" – including a bailment or any other debt;

"accumulated profits" – as defined in section 77(a), less the amount of accumulated profits attributed to the income of a shareholder of the closely held company under this Ordinance, including under sections 3(i1), 62a, 64 or 64a;

"liable accumulated profits" – the difference between accumulated profits and exempt accumulated profits;

"exempt accumulated profits" – one of the following, at the taxpayer's election:

"means of control" – as defined in section 62a;

"equity" – share capital or premium as defined in the Companies Law;

"right in real property" – excluding a building in the computation of income arising from its sale to which the provisions of section 8a(c) apply, or land designated for the construction of such a building;

"held body of persons" – a body of persons in which the closely held company holds, directly or indirectly, at least 10% of the right to profits therein, excluding a body of persons the majority of whose value, directly or indirectly, originates in held special assets; for this purpose, "held special assets" – special assets, excluding a security held directly at a rate of more than 10%;

"trading stock" – as defined in section 85;

"assets of the company" – cash, cash equivalents, any property, whether real property or movable property, and any right or benefit, whether vested or contingent, all whether in Israel or outside Israel;

"special assets" – each of the following:

"cost" – the cost of trading stock, the balance of the original price as defined in section 88, or the balance of the acquisition value as defined in section 47 of the Land Taxation Law plus depreciation, as the case may be.

Amounts paid, or to be paid, as additional tax under this Section shall not be allowed as a deduction in the determination of the taxable income of a closely held company.

A closely held company shall report, within the return it is required to file under section 131, the amount of additional tax it is liable to pay under this Section, or if it is not liable to pay additional tax under this Section, and shall also set out in detail the computation on which that report is based.