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 IV: Splits of Companies, Co-operative Societies and Associations
Definitions§
105.
In this Chapter –
"company" – including a trust fund, or an association incorporated in Israel under the Associations Law;
"adjusted reports" – financial statements drawn up and adjusted in accordance with opinions of the Institute of Certified Public Accountants in Israel and audited by an auditor or a supervisory union officer within the meaning of section 131;
"holding company" – a company whose entire assets are rights in companies, or assets that cannot be transferred by law, and which has no income other than income originating from the distribution of dividends or from assets that cannot be transferred by law;
"continuing split company" – a split company that is not a holding company, and from which not all of its assets and liabilities have been transferred.
Methods of Split§
105a.
A split may be effected in one of the following ways:
(1)the transfer of assets and liabilities of a split company to a new company established for the purpose of the split, the rights in which are held by the same right-holders as in the split company, and the share of each right-holder in the new company is identical to that person's share in the split company;
(2)the transfer of assets and liabilities of a split company to a new company established for the purpose of the split, which is wholly owned by the split company.
Exemption from Taxes§
105b.
(a)The cancellation of shares of a split company or the reduction of its capital in a split under section 105a(1) and the transfer of assets of a split company to a new company shall not be liable to tax under this Ordinance or under the Land Taxation Law, all provided that the conditions set out in this Chapter have been fulfilled.
(b)In every case where a sale is not liable to tax on the gain by reason of the provisions of subsection (a), the sale shall be liable to acquisition tax at a rate of 0.5% of its value.
Conditions for Eligibility§
105c.
(a)The benefits under this Chapter shall apply with respect to a split if all of the following are fulfilled:
(1)the company seeks to split for a business and economic purpose and the avoidance of tax or the inappropriate reduction of tax are not among the principal purposes of the split;
(2)the majority of the assets remaining with the split company and the majority of the assets transferred to the new company in the framework of the split were not sold by either of them during the required period, and during that period such assets were put to customary use in the circumstances of the matter in the ordinary course of the company's business; for this purpose –
"asset" and "majority of assets" – as their meaning in section 103c(2), however in the count of assets of a split company in a split under section 105a(2), the rights in the new company shall not be included;
(3)the principal economic activity that existed in the split company in the two years preceding the date of the split continues in the new company or in the continuing split company during the required period;
(4)the new company and likewise the continuing split company have economic activity originating from the activity of the split company, and if the split company is an association or a co-operative society, the activity that existed before the split in the association or in the co-operative society, as the case may be, continues in it or in the new company, provided that the income from such activity is liable to tax or is expected to be liable to tax, as the case may be, under section 2(1), or that the income from such activity is liable to tax or is expected to be liable to tax, as the case may be, under section 2 except paragraph (1) thereof, and the Director has approved that such income constitutes income deriving from economic activity as aforesaid; a request for such approval shall be submitted before the split;
(5)the split company and the new company are one of the following:
(a)a resident of Israel incorporated in Israel under the Companies Ordinance, the Companies Law, the Co-operative Societies Ordinance or the Associations Law;
(b)a company approved by the Director for this purpose that is a foreign resident company, or a resident of 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 a guarantee and to other conditions, as the Director shall determine;
(6)
(a)the value of the assets transferred from a split company to each of the new companies in the course of a split or remaining in a continuing split company, in each of them, shall not be less than 10% of the value of the assets of the split company, all in accordance with the value set out in the adjusted reports as at the date of the split; for this purpose – rights held by a split company in a split under section 105a(2) in a new company shall not be included in the count of assets;
(b)immediately after a split under section 105a(1), the market value of a new company shall not exceed nine times the market value of another new company, and if the split company was a continuing split company – the market value of each new company shall not exceed nine times the market value of the split company, and shall not be less than one-ninth of the market value of the split company;
(c)upon a request by the company, the Director may, for reasons that shall be recorded, determine that a split company shall distribute its assets otherwise than as set out in sub-paragraphs (a) or (b), if it has been proved to the Director's satisfaction that the provisions thereof are liable to prejudice the purpose of the split, all subject to such conditions as the Director shall determine;
(7)
(a)immediately after the split, the shareholders of the split company shall hold in each of the new companies in a split under section 105a(1) and in the continuing split company the same rights as they held in the split company, and the same share in each of the rights, all proximate to the date of the split;
(b)immediately after the split, a split company under section 105a(2) shall hold the full rights in the new company;
(c)(Repealed)
(8)(Repealed)
(8a)(Repealed)
(9)the date of the split shall be at the end of the tax year;
(10)no cash payments or any additional consideration were transferred in the framework of the split between the right-holders in the split company;
(11)during the required period there were no transfers of cash or assets, provision of guarantees or any other activity between the new companies themselves or between them and the split company, as the case may be, except in the ordinary course of business;
(12)after the split, the value of assets exceeds the value of liabilities in each of the new companies and in the split company, as the case may be, all according to adjusted reports as at the date of the split;
(13)in respect of a split as referred to in section 105a(1) – before the split, the Director's approval as referred to in section 105h(b) was given for the split plan, and in respect of a split as referred to in section 105a(2) – the reports and documents that are required to be submitted under section 103s(a) as applied in respect of a split as referred to in section 105h(a) were submitted;
(14)(Repealed)
(15)if the split company was a trust fund, it shall be entitled to split only into trust funds of the same type as the split company.
(b)The Minister of Finance, with the approval of the Finance Committee of the Knesset, may prescribe additional conditions and rules for the carrying out of the split, as well as categories of splits in which the Director's approval as referred to in subsection (a)(13) shall not be required.
Distribution of Liabilities and Profits§
105d.
(a)The liabilities of the split company shall be distributed between the new companies, or between the continuing split company and the new company, as the case may be, in accordance with the following rules:
(1)liabilities that do not constitute equity under section 1a of Schedule A to the Inflation Adjustments Law, which can be attributed to a particular asset or a particular activity, shall be attributed to the company holding the asset; however, a liability exceeding the value of the asset shall not be attributed to that asset, all according to the adjusted reports as at the date of the split;
(2)the balance of liabilities not attributed as aforesaid in paragraph (1) shall be attributed in accordance with the ratio of the value of assets in that company to the total value of assets of the split company before the split according to adjusted reports as at the date of the split; for this purpose, "value of assets" – the value of assets less liabilities attributed as aforesaid in paragraph (1) and less the value of rights held by a split company in a new company.
(b)Losses of a continuing split company under sections 28 and 92, as the case may be, shall be distributed between the new companies or between the split company and the new company in accordance with their equity ratios (hereinafter – the equity ratio), provided that losses under section 28(h) shall remain with the company in which the asset from which the loss arose is located; for the purposes of this section, "equity" – the amount by which the value of the company's assets, excluding the value of rights held by a split company in a new company, exceeds the value of liabilities attributed to the company as aforesaid in subsection (a), all according to adjusted reports as at the date of the split.
(c)Profits distributable as their meaning in section 94b –
(1)in a split under section 105a(1) shall be distributed between the continuing split company and the new company or between the new companies, as the case may be, in accordance with the equity ratio;
(2)in a split under section 105a(2) shall remain with the split company;
(3)the Director shall prescribe rules regarding their calculation.
(d)(Repealed)
(e)An inflation deduction as its meaning in section 7 of the Inflation Adjustments Law shall be distributed in accordance with the equity ratio; however, a deduction as aforesaid that is attributed under section 7(e) of that Law to a work unit as defined in section 18(d) shall remain with the company in which the work unit is located.
(f)
(1)Notwithstanding the provisions of this Ordinance, if a split company under section 105a(1) 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 split the split company could have distributed a dividend under sections 47(a2) and (b)(2) or 51b(a) and (c) of that Law, the portion of the dividend not exceeding the surplus of assets transferred to the new company as aforesaid in those sections, as the case may be, shall be liable to tax at the time of the split as if it had been distributed;
(2)where a shareholder sold a share in a new company allotted to that shareholder in the split, or a share in a split company, exempt from tax under section 97, during the required period, the surplus of assets as aforesaid in paragraph (1), according to that shareholder's share at the date of the split, shall be deemed to have been distributed to that shareholder as a dividend on that date.
(g)Liabilities, contingent liabilities, income, expenses, deductions or any similar items that were not recorded in the reports of the split company at the date of the split and originate from its activity before the date of the split shall be distributed between the continuing split company and the new company or between the new companies, as the case may be, in accordance with the Director's instructions.
105e.§
(Repealed — תשע״ז־17)
Status of Asset Transferred in Split§
105f.
(a)An asset transferred to a new company in a split – its original price, balance of original price, acquisition value and acquisition date, all as the case may be, for the purposes of this Ordinance, the Inflation Adjustments Law and the Land Taxation Law, shall be as they were in the split company had the asset not been transferred, and they shall be allowed to the new company at the time of sale as deductions that would have been allowed to the split company had it sold the asset; in respect of an asset as aforesaid that is inventory, the amount determined for the purposes of the assessment of the split company at the date of the split shall be deemed the cost of inventory.
(b)(Repealed)
Gain from Sale of Shares§
105g.
Where a person sold a share in a new company allotted to that person in a split (hereinafter – the new share) or a share in a split company, the following provisions shall apply:
(1)in a split under section 105a(1), the proportionate share of the original price of the shares in the split company, in accordance with the equity ratio as referred to in section 105d(b), adjusted according to the rate of increase of the index from the day of acquisition of the shares in the split company until the date of the split, and less any real loss that would have arisen had the proportionate share of the share been sold on the date of the split, shall be deemed the original price of the shares in the new company, provided that it shall not be less than the proportionate share of the original price of the shares in the split company (hereinafter – the adjusted price); the difference between the original price of the proportionate share of the shares in the split company and the adjusted price as aforesaid shall hereinafter be called the "adjustment differential"; the original price of the shares in the split company shall be reduced in accordance with the equity ratio as referred to in section 105d(b); for this purpose, "real loss" – the amount by which the market value of the share is lower than its adjusted original price;
(2)in a split under section 105a(2), the original price of the shares in the new company shall be determined in accordance with the surplus of assets transferred to it, less any real loss that would have arisen had the assets and liabilities been sold together on the date of the split (hereinafter – the adjusted price); for this purpose –
"adjustment differential" – the difference between the balance of the original price of the transferred assets and the balance of their adjusted original price;
"surplus of assets" – the excess of the balance of the adjusted original price of the assets over the liabilities in accordance with the adjusted reports as at the date of the split;
"real loss" – the amount by which the market value of the transferred assets and liabilities together is lower than the balance of their adjusted original price less the liabilities;
(3)an adjustment differential as referred to in paragraphs (1) and (2) that forms part of the original price of the shares being sold shall be added to the consideration from the sale of the shares, as the case may be, and shall be deemed an additional inflationary amount;
(4)the date of the split shall be deemed the acquisition date of the shares in the new company; however, for the purpose of calculating the real capital gain under section 91(b1) or for the purpose of calculating the real appreciation under section 48a(b1) of the Land Taxation Law, as the case may be, up to the date of change, the acquisition date of the shares in the split company shall be deemed the acquisition date of the shares in the new company;
(5)in a split under section 105a(1), if the shareholder was a foreign resident at the time of the split and requested at the time of the sale of the shares of the new company that the exchange rate at which the shares in the split company were acquired be regarded as the index for the purpose of calculating the adjusted price, the adjustment differential shall be exempt from tax;
(6)upon the sale of the new share, a tax exemption as referred to in section 97, or under section 105n(a), shall apply only if the seller was entitled, prior to the date of the split, to a tax exemption as aforesaid, had the seller sold the share in the split company prior to the date of the split; however, the condition under this paragraph shall not apply to a tax exemption as referred to in section 97(a)(5).
Miscellaneous Provisions§
105h.
(a)The provisions of sections 103g, 103i to 103l and 103n to 103s shall apply with respect to a split, with the necessary modifications, as the case may be, and for this purpose, wherever –
(1)"merger" is written, read "split";
(2)"date of merger" is written, read "date of split";
(3)"transferring company" is written, read "split company";
(4)"absorbing company" is written, read "new company".
(b)Notwithstanding the provisions of section 103i, in respect of a split as referred to in section 105a(1), the benefits prescribed in section 105b shall not be granted if the Director's approval was not received before the split; if the Director determined that the split does not fulfil the conditions set out in this Chapter, it shall be possible to appeal against that decision as if it were an Order under section 152.
(c)Where a company has split, the provisions of section 130a shall apply to it, if it is not a holding company, and to the new companies after the split, if that section applied to the split company before the split.
Split into an Existing Company§
105i.
(a)The transfer of assets, liabilities and capital from a split company to a company that is not a new company established for that purpose shall be exempt from tax as referred to in this Part, if the Director's approval has been given therefor, pursuant to a request submitted to the Director before the date of the split as aforesaid; the Director shall grant such approval if it has been proved to the Director's satisfaction that the conditions set out in Chapter II and Chapter IV of this Part are fulfilled, with the necessary modifications.
(b)Against the Director's decision under subsection (a), an appeal may be brought as if it were an Order under section 152(b).
Authorisation Regarding Restructuring of Real Property Associations§
105j.
The Minister of Finance, with the approval of the Finance Committee of the Knesset, may make Regulations with respect to sections 104a(b1) and 104h, and may make the exemption under those sections subject to conditions, including the modification of the periods or conditions prescribed in those sections, and may also prescribe circumstances in which the provisions of those sections shall not apply.
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