OrdinanceTax Law
Income Tax Ordinance [New Version]
פקודת מס הכנסה [נוסח חדש]
Published: 1961-04-25Last amended 2026-06-08✓ Amendment status checked against the Knesset legislation record on 2026-09-04
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Chapter III: Transfer of Assets in Exchange for Shares
Definitions§
104.
In this Chapter —
"asset" — an asset, excluding —
(1)movable property of an individual held by him for his personal use or for the personal use of his family members or of persons dependent upon him;
(2)trading stock;
(3)a possessory right in real property — whether at law or in equity — used for residential purposes and not for the purpose of earning income or profit;
"company" —
(1)a company resident in Israel that was incorporated in Israel under the Companies Ordinance, the Companies Law, or a co-operative society incorporated in Israel under the Co-operative Societies Ordinance;
(2)a company approved by the Director for this purpose that is a foreign resident, or a company resident in Israel that is a foreign company as defined in the Companies Ordinance or in the Companies Law; such approval may be made subject to the provision of guarantees and to other conditions as the Director shall prescribe;
"capital gain" — including appreciation.
Transfer of Full Rights in an Asset§
104a.
(a)A person who transfers all his rights in an asset to a company that is not a real property association, in exchange for receiving the existing rights in that company, shall not be subject to tax under this Ordinance or under the Land Taxation Law, as the case may be, if all of the following are fulfilled:
(1)
(a)The transferor holds, immediately after the transfer date, rights conferring upon him at least 90% of each of the rights in the company;
(b)(Repealed)
(2)The company holds the asset transferred to it during the required period;
(3)The ratio between the market value of the rights allocated to the transferor and the market value of all the rights in the company immediately after the allocation is equal to the ratio between the market value of the transferred asset and the market value of the company immediately after the transfer;
(4)The company shall not be a real property association for a period of two years from the transfer date.
(b)(Repealed)
(b1)Where an asset was transferred to a company that is a real property association or that became a real property association after the transfer of the asset, the provisions of subsection (a) shall apply, provided that the transferor's full rights in the asset were transferred.
(c)(Repealed)
Transfer of an Asset by Several Persons§
104b.
(a)Partners in a partnership or joint owners who cause the transfer of all their rights in an asset owned by the partnership, or who transfer all their rights in an asset in their joint ownership, as the case may be, to a company in exchange for the allocation of shares only in that company, shall not be subject to tax under this Ordinance or under the Land Taxation Law, as the case may be, if all of the following are fulfilled:
(1)
(a)The asset was transferred to a company established specifically for that purpose and that company had no other asset or other activity at the time of the transfer or prior thereto (in this paragraph — a new company) — the share of each of the partners or joint owners in each of the rights in the company, immediately after the transfer, is identical to the share that each had prior to the transfer in each asset transferred as aforesaid or in the partnership, as the case may be;
(b)The asset was transferred to a company that is not a company as referred to in sub-paragraph (a) (in this paragraph — an existing company) — the holders of rights in the existing company were, prior to the transfer, the holders of rights in the asset or in the partnership, and immediately after the transfer each of them held a share in the rights in the existing company identical to the share he held in the rights in that company and to his share in the asset or in the partnership, as the case may be, prior to the transfer;
(c)(Repealed)
(2)The company holds the transferred assets during the required period;
(3)The ratio between the market value of the rights allocated to each of the partners or owners and the total market value of the company immediately after the allocation is equal to the ratio between the market value of the partner's or owner's share in the asset and the market value of the company immediately after the transfer date;
(4)(Repealed)
(b)Where several assets in joint ownership are transferred, or where an asset in joint ownership and an asset owned by a partnership are transferred, the provisions of subsection (a) shall apply only if the share of each of the joint owners in each of the transferred assets is identical to his share in all the other assets, and in the case of a partnership — also to his share in the partnership.
(c)
(1)For the purposes of subsections (a) and (b), rights in one company shall be regarded as one asset and the holders of rights shall be regarded as partners in that asset;
(2)(Repealed)
(d)Several individuals each of whom transfers at the same time a depreciable asset to a company established specifically for that purpose, in exchange for the allocation of shares only, and that company had no other asset or other activity at that time or prior thereto, shall not be subject to tax under this Ordinance at the time of the transfer if all of the following are fulfilled:
(1)The purpose of the transfer is the unified management and operation of the transferred assets;
(2)In exchange for the transfer of the asset or assets, shares are allocated to each of the individuals whose proportion of the total shares of the company equals the ratio between the market value of the asset he transferred and the market value of all the assets transferred under this subsection;
(3)For a period of at least two years from the transfer date, no change occurs in the rights of the shareholders in the company that was established;
(4)The transferred assets shall be used in the company in the manner customary in the circumstances in the ordinary course of the company's business and shall remain therein for at least two years from the transfer date;
(5)No more than ten individuals shall be incorporated within the framework of a company under this subsection, however the Director may approve that a greater number of individuals be incorporated in a co-operative society;
(6)The market value of the asset transferred by each of the individuals shall not exceed four times the market value of the asset transferred by any other individual, all at the time of the transfer; the Director may alter the said rate, for reasons that shall be recorded;
(7)No asset that is a right in real property shall be transferred within the framework of this subsection.
(e)The provisions of subsection (d) shall not apply in respect of an asset that is owned by a partnership or in the joint ownership of several owners.
(f)A company that transfers an asset to another company in which the holders of rights are identical to the holders of rights in the transferring company, and the share of each holder of rights therein is identical to his share in the transferring company (hereinafter — a sister company), shall not be subject to tax at the time of the transfer under this Ordinance or under the Land Taxation Law, as the case may be, if the conditions prescribed by the Minister of Finance are fulfilled.
(f1)(Repealed)
Transfer of Shares to a Parent Company§
104c.
(a)A company that transfers to all of its shareholders, on a proportionate basis in accordance with their respective holdings in the transferring company, all the shares it holds in another company (hereinafter – the transferred shares) shall not be liable to tax under this Ordinance or under the Land Taxation Law in respect of the sale of the transferred shares if all of the following conditions are met, provided that the approval of the Assessing Officer has been obtained prior to the transfer:
(1)the shareholder or shareholders, as the case may be (hereinafter – the parent company), are one or more companies holding all the rights in the transferring company;
(2)no consideration was given in respect of the transferred shares, whether in money or money's worth, whether directly or indirectly;
(3)the transferred shares shall remain in the parent company for at least two years from the date of the transfer;
(4)(Repealed)
(5)court approval has been granted in accordance with section 303 of the Companies Law, if such approval was required;
(6)the shares are transferred for a business and economic purpose, and the improper avoidance of tax or reduction of tax are not among the principal purposes of the transfer.
(b)If the transferring company had an approved enterprise within the meaning of the Capital Investment Encouragement Law, or a benefited enterprise as defined in section 51 of that Law, and the company is able, at the time of the transfer, to distribute a dividend pursuant to section 47(a2) and (b)(2) or section 51b(a) and (c) of that Law, the transfer of the transferred shares shall be deemed to be a distribution of a dividend as aforesaid.
(c)The Assessing Officer shall prescribe rules regarding the adjustments required for the purposes of this section, regarding the transferring company and the parent company, regarding the determination of the original cost or the consideration, or regarding any other matter.
(d)(Repealed)
(e)
(1)The provisions of subsections (a) to (c) shall apply, with such modifications as the Assessing Officer shall direct, including the non-application of some of those provisions, to banking corporations within the meaning of the Banking (Licensing) Law, 5741-1981, and to companies under their control, that transfer, in the tax years 1996 and 1997, rights held by them in real corporations within the meaning of that Law, provided that if the transferor is the banking corporation, the company to which the shares were transferred shall not have income as referred to in section 2(1) for two years from the date of the transfer;
(2)the conditions referred to in subsection (a)(3) and (4) shall also apply to a transfer as referred to in paragraph (1), except in the case of a sale of rights in a real corporation that was transferred to a parent company that is the banking corporation, or in the case of a sale of rights in the transferring real corporation, where such sales are made for the purpose of complying with the provisions of the Banking (Licensing) Law, 5741-1981;
(3)without derogating from the provisions of any law, decisions regarding the transfer of shares as referred to in this subsection require the approval of the general meeting of the transferring corporation and shall have the same effect as a special resolution within the meaning of section 115(a)(3) of the Companies Ordinance.
(e1)If the Assessing Officer did not approve the transfer of shares pursuant to the provisions of subsection (a), an appeal may be lodged against that decision as if it were an order under section 152(b).
(f)The Minister of Finance, with the approval of the Finance Committee of the Knesset, may prescribe provisions regarding the application of this section, in whole or in part, to foreign companies, subject to the restrictions and conditions that the Minister has prescribed.
Sale of Rights and Assets§
104d.
For the purposes of sections 104a to 104c –
(1)(Repealed)
(1a)(Repealed)
(2)(Repealed)
(3)an exchange of assets to which section 96 or section 27 has been applied, or an involuntary sale thereof, shall not be regarded as a sale of an asset;
(4)wherever a sale is not liable to tax on appreciation by reason of the provisions of this Chapter, the sale shall be liable to acquisition tax at the rate of 0.5% of its value;
(5)(Repealed)
Methods of Computation upon Sale of the Asset§
104e.
(a)In respect of an asset transferred as referred to in sections 104a and 104b, its original cost, the balance of the original cost, the date of acquisition and the acquisition value, for the purposes of this Ordinance and for the purposes of the Land Taxation Law, shall be as they were in the hands of the transferor, and deductions that would have been permitted to the transferor had the transferor sold the asset shall be permitted to the seller as a deduction.
(b)(Repealed)
(c)The provisions of section 103t(b1) and (b2) shall apply, with the necessary modifications, to the set-off of capital gain or capital loss arising from the sale of an asset transferred as referred to in sections 104a to 104c; however, the provisions of section 103t(b2) shall not apply in this regard if means of control exceeding 50% were acquired in the company to which the asset was transferred, after at least three tax years preceding the commencement of the tax year in which the asset was transferred have elapsed.
Sale of the Shares§
104f.
(a)Upon the sale of shares received in exchange for an asset as referred to in sections 104a and 104b, the following provisions shall apply:
(1)the original cost of the shares shall be deemed to be the balance of the original cost of the transferred asset, as adjusted from the date of acquisition of the asset by the transferor until the date of the transfer, and less any real loss that would have arisen had the asset been sold on the date of its transfer, provided that it shall not be less than the balance of the original cost of the transferred asset (hereinafter – the adjusted cost); the difference between the balance of the original cost of the transferred asset and the adjusted cost shall hereinafter be referred to as the "adjustment differential"; for this purpose, "real loss" means the amount by which the market value of the asset is lower than its adjusted balance of original cost;
(2)an adjustment differential forming part of the original cost of the shares being sold shall be added to the consideration from the sale of the shares and shall be treated as an additional inflationary amount;
(3)the date of acquisition of the shares shall be deemed to be the date of the transfer of the asset; however, upon the sale of shares received in exchange for an asset that was acquired up to the changeover date, the date of acquisition of the asset that was transferred shall be deemed, for the purposes of the liability to tax on real capital gain under section 91(b1) or the liability to tax on real appreciation under section 48a(b1) of the Land Taxation Law, to be the date of acquisition of the share;
(4)upon the sale of a share by the transferor, an exemption from tax as referred to in section 97, or under section 105n(a), shall apply only if the transferor was entitled, prior to the date of the transfer of the asset, to such a tax exemption as if the transferor had sold the asset prior to the date of its transfer; however, the condition under this paragraph shall not apply to a tax exemption as referred to in section 97(a)(5).
(b)If a shareholder sold, during the required period, a share of a sister company that received an asset by way of transfer under section 104b(f), or a share of a transferring company that transferred an asset under the provisions of that section, with a tax exemption under section 97, as referred to in subsection (a)(4), the shareholder's proportionate share in the cost of the asset shall be deemed to have been distributed to the shareholder as a dividend on the date of the transfer of the asset; the shareholder's proportionate share in the cost of the asset shall be calculated according to the shareholder's proportionate share in the rights in the transferring company at the time of the transfer.
(c)Notwithstanding the provisions of this Ordinance, if a transferring company that transferred an asset to a sister company as referred to in section 104b(f) had an approved enterprise within the meaning of the Capital Investment Encouragement Law or a benefited enterprise as defined in section 51 of that Law, and at the time of the transfer the transferring company was able to distribute a dividend pursuant to section 47(a2) and (b)(2) or section 51b(a) and (c) of that Law, that portion of the dividend not exceeding the cost of the assets transferred to the sister company as referred to in those sections, as the case may be, shall be liable to tax at the time of the transfer as if it had been distributed.
Miscellaneous Provisions§
104g.
(a)The provisions of sections 104a to 104c shall apply only if the person transferring the asset has notified the assessing officer in writing within 30 days of the date of the transfer of the asset of such transfer, and has attached to the notice reports, declarations and particulars, all as prescribed by the Minister of Finance in Regulations.
(b)
(1)The provisions of sections 103j, 103l and 103o shall apply to the person transferring the asset as if that person were a transferring company or a shareholder therein, as the case may be, and as if the company to which the asset was transferred were an absorbing company, all with the necessary modifications as the case may require; nothing in the provisions of this paragraph shall derogate from the provisions of section 104e(c);
(2)(Repealed)
(c)Where a company has transferred an asset, the provisions of the Inflation Adjustments Law and of section 130a that would have applied to the company that transferred the asset shall apply in respect of that asset and in respect of the company to which it was transferred, for two years from the date of the transfer, all with the adjustments that the Assessing Officer shall direct.
(d)A person applying for approval under this Chapter shall pay an application fee in an amount to be prescribed by the Minister of Finance, and the Minister may prescribe different fees for different categories of transfers, having regard, inter alia, to the value of the assets transferred or to the manner of their transfer.
Share Exchange§
104h.
(a)In this section –
"share exchange" – the transfer of shares of a company (in this section – the transferred company), including rights to acquire shares (in this section – the transferred shares), in exchange for the allotment of shares listed for trading on a stock exchange in another company, whether with or without additional consideration (in this section – the absorbing company and the allotted shares);
"transferor" – a person who transferred the transferred shares to the absorbing company;
"blocked share" – a share whose sale is absolutely restricted, pursuant to provisions of law or pursuant to the directions of the authority empowered by law to prescribe rules regarding the trading of securities, for a period that has been prescribed (in this section – the blocking period);
"sale date" – the earlier of the following:
(a)the date on which the allotted share was sold;
(b)the date of the end of the deferral period; for this purpose, "date of the end of the deferral period" –
(1)in respect of allotted shares that are not blocked shares –
(a)in respect of half of them – twenty-four months from the date of the exchange; for the purposes of calculating the half, the allotted shares, including the blocked shares, that were sold by the end of the said twenty-four months shall be taken into account;
(b)in respect of the remainder – forty-eight months from the date of the exchange;
(2)in respect of blocked shares –
(a)in respect of half of them – twenty-four months from the date of the exchange or the end of 6 months from the end of the blocking period, whichever is later, provided that the blocked shares with shorter blocking periods than other blocking periods prescribed for the remainder of the blocked shares shall be taken into account first; for the purposes of calculating the half, the shares sold as referred to in sub-paragraph (1)(a) up to that date shall be taken into account;
(b)in respect of the remainder – forty-eight months from the date of the exchange or the end of 6 months from the end of the blocking period, whichever is later;
"trustee" – a person approved by the Assessing Officer as a trustee for the purposes of this section;
"value at the date of the end of the deferral period" – the amount obtained by adding together the value of the share on the stock exchange at the close of trading on each day of the 30 trading days preceding the date of the end of the deferral period, divided by 30;
"additional consideration" – a cash amount given in exchange for the transferred shares, in addition to the allotted shares.
(b)
(1)A share exchange shall not be regarded, at the time of the exchange, as a sale thereof for the purposes of Part 5 or for the purposes of the Land Taxation Law, if all of the following conditions are met:
(a)the ratio between the market value of the transferred shares and the market value of the absorbing company immediately after the share exchange is equal to the ratio between the market value of the allotted shares, including the additional consideration, and the market value of all the rights in the absorbing company immediately after the share exchange;
(b)the absorbing company allotted shares of equal rights to all the transferors from the same company;
(c)(Repealed)
(d)all the shares as well as all the rights to acquire shares of the transferor and of a related party thereto in the transferred company were transferred in the framework of the share exchange, unless the Assessing Officer approved otherwise, subject to conditions that the Assessing Officer prescribed;
(e)an application was submitted to the Assessing Officer for approval that the share exchange meets the conditions set out in this section, provided that the application was submitted at least 30 days before the date of the share exchange and the Assessing Officer gave approval; approval under this paragraph may be made conditional on the provision of guarantees to the satisfaction of the Assessing Officer and on other conditions as the Assessing Officer shall prescribe;
(f)the allotted shares shall be deposited with a trustee for the purpose of securing the payment of tax and compliance with the provisions of this section;
(1a)if the share exchange included additional consideration, the following provisions shall apply:
(a)the benefits prescribed in this section shall not apply to the holders of rights who received such consideration, in connection with that consideration, and they shall be liable to the taxes applicable under any law;
(b)the rights for which cash consideration was paid and their original cost shall be calculated according to the ratio between the value of the consideration paid in cash and the value of the total consideration given for all the rights in the transferred company;
(2)if the Assessing Officer determined that the share exchange does not fulfil the conditions prescribed in this section, an appeal may be lodged against that decision as if it were an order under section 152(b);
(3)notwithstanding the provisions of this subsection, a share exchange of shares of a transferred company that is a real property association shall be regarded, at the time of the exchange, as a sale thereof for the purposes of liability to acquisition tax under the Land Taxation Law.
(c)If the conditions referred to in subsection (b) are met, the following provisions shall apply:
(1)the allotted shares shall be deemed to be sold on the sale date;
(2)the consideration shall be calculated in accordance with the following provisions:
(a)if the allotted share was sold before the date of the end of the deferral period – the sale consideration;
(b)if the allotted share was not sold by the date of the end of the deferral period – its value at the date of the end of the deferral period;
all of the above with the addition of the amounts of the dividends distributed in respect of the allotted shares in the period between the date of the exchange and the sale date, divided by the number of allotted shares;
(3)the provisions of section 104f shall apply with the necessary modifications, and for this purpose the transferred shares shall be deemed to be an asset;
(4)(Repealed)
(5)upon the sale of the allotted shares, the following provisions shall apply:
(a)the portion of the capital gain up to the date of the share exchange shall be liable to tax at the tax rate that would have applied had the provisions of section 104h not applied at the time of the share exchange;
(b)the portion of the capital gain from the date of the share exchange until the sale date shall be liable to tax in accordance with the provisions of section 91(a) or (b), as the case may be;
(c)upon the sale of the allotted share, a tax exemption as referred to in section 97, or under section 105n(a), shall apply only if the transferor was entitled, prior to the date of the share exchange, to such a tax exemption as if the transferor had sold those shares prior to the date of their exchange; however, the condition under this sub-paragraph shall not apply to a tax exemption as referred to in section 97(a)(5);
(d)for the purposes of this paragraph, "portion of the capital gain up to the date of the share exchange" – the capital gain, multiplied by the ratio between the period from the date of acquisition of the transferred shares until the date of the share exchange and divided by the period from the date of acquisition as aforesaid until the sale date of the allotted shares;
(6)if the transferor sold the allotted shares after the date of the end of the deferral period, the allotted shares shall be deemed to have been newly acquired, the date of the end of the deferral period shall be deemed to be the date of acquisition, and the value at the date of the end of the deferral period shall be deemed to be the original cost;
(7)notwithstanding the provisions of any law, a merger or split of the absorbing company after the share exchange shall not be regarded as a sale of the allotted shares, and the Assessing Officer may prescribe special provisions in rules in this regard;
(8)
(a)upon the sale of the allotted shares, the distributable profits accumulated in the transferred company from the end of the tax year preceding the year in which the transferred shares were acquired by the transferor until the end of the tax year preceding the year in which the share exchange was effected (hereinafter – the year of exchange), as defined in section 94b, shall be regarded as distributable profits for the purposes of section 94b, provided that distributable profits accumulated before the 9th day of Tevet 5756 (1 January 1996) shall not be taken into account;
(b)The Assessing Officer shall prescribe rules regarding the determination of distributable profits in a share exchange where the allotted shares are shares in a company that is a resident of Israel;
(9)the amount of tax paid by the transferor to the assessing officer on income from a dividend in respect of the allotted shares, distributed in the period between the date of the exchange and the sale date, shall be adjusted from the date of payment of the tax until the sale date, and shall be divided by the number of allotted shares in respect of which the dividend was distributed, and a credit shall be given therefor against the tax applicable to the capital gain on the sale of the allotted shares;
(10)if bonus shares were allotted to the transferor in the period between the date of the share exchange and the sale date, they shall be deemed to be allotted shares;
(11)
(a)if the transferor was a resident of Israel at the time of the share exchange, the transferor shall be deemed to be a resident of Israel also on the sale date;
(b)if the transferor was a non-resident and section 89(b) would have applied had the transferor sold the transferred shares at the time of the share exchange, the allotted shares shall be deemed to be an asset in Israel.
(d)If the conditions referred to in subsection (b) are met, the following provisions shall apply to the transferred shares held by the absorbing company:
(1)a gain or loss arising from the sale of the transferred shares shall not be permitted for set-off in the tax year in which the shares were exchanged and during the two years thereafter, against a loss or gain in the absorbing company, all pursuant to sections 28 or 92, as the case may be, and during the following three years a gain or loss arising from the sale of the transferred shares as aforesaid shall not be permitted for set-off against a gain or loss arising from the sale of assets whose date of acquisition was before the date of the share exchange;
(2)
(a)the date of the share exchange shall be regarded as the date of acquisition of the transferred shares, and the market value of the allotted shares at the time of the share exchange, divided by the number of transferred shares, shall be regarded as the original cost of the transferred share;
(b)notwithstanding the provisions of sub-paragraph (a), if on the eve of the share exchange the transferor and the absorbing company are related parties, the assessing officer may determine –
(1)that the original cost of the transferred shares shall be the consideration as referred to in subsection (c)(2), and the sale date of the allotted shares as determined for the transferor shall be regarded as the date of their acquisition, even if the absorbing company sold the transferred shares before the sale date;
(2)that if the allotted shares were sold on several dates, the original cost of the transferred shares shall be the total consideration from all sales of the allotted shares, and the last sale date determined for any of the allotted shares shall be regarded as the date of acquisition of the transferred shares, even if the absorbing company sold the transferred shares before the said last sale date.
(e)For the purposes of section 102(b), a share exchange shall not be regarded as a sale of the transferred shares; the Assessing Officer may prescribe special provisions in rules regarding the application of the provisions of this section, in whole or in part, with the necessary modifications.
(f)(Repealed)
(g)
(1)the trustee shall notify the assessing officer in writing of the date of the end of the deferral period;
(2)at the time of the sale, the trustee shall withhold tax at the rate referred to in section 91(a), (b) or (b1), as the case may be, from the consideration, or at a lower rate as prescribed by the assessing officer, and shall transfer it to the assessing officer within seven days.
(h)If it becomes apparent that particulars furnished to the Assessing Officer are materially incorrect or incomplete, or if it becomes apparent that material particulars specified in the application to the Assessing Officer do not fulfil the conditions prescribed in subsection (b)(1), the assessing officer may, at the assessing officer's discretion, determine that the consideration received by the transferor for the transferred shares is the consideration as calculated under this section, or the market value of the transferred shares at the time of the share exchange, whichever is higher; the assessing officer shall make the adjustments required in respect of the original cost and the date of acquisition of the transferred shares in the hands of the absorbing company.
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