Spinoff May Trigger Tax Bill for Israeli Telecom Giant

Trust Bloomberg Tax's Premier International Tax offering for the news and guidance to navigate the complex tax treaty networks and business regulations.

By Matthew Kalman (Bloomberg Tax)

Israel’s main telecommunications company could be hit with a 23 percent capital gains tax if it divests its infrastructure assets, a move the government is considering, practitioners told Bloomberg Tax.

The Israel government may force Bezeq Israeli Telecommunication Corp. separate from its infrastructure holdings in an effort to boost competition in the sector. The idea comes after Israeli regulators found Bezeq failed to upgrade its fixed-line services and fully facilitate its use by competing operators as required.

Whether Bezeq sells the assets directly to a third party, or transfers them to a new company, the move will be considered a taxable event, said Harel Perlmutter, head of tax at Barnea law firm in Tel Aviv.

“The bottom line will be that in any case of transferring the asset outside the company in one way or another, that will cause a tax event that most likely to result in a tax payment by the company,” Perlmutter said April 18.

It wouldn’t be the first penalty for Bezeq, which had fixed assets valued at 6.8 billion shekels ($1.9 billion) as of Dec. 31, 2017. The Antitrust Authority in March charged the company 30 million shekels for “abusing its monopoly over communications infrastructures.”

Bezeq and the Israeli government didn’t return requests for comment.

Similar Moves

Practitioners pointed to several other examples in which the government required companies to separate assets.

The government in 2017 forced some of Israel’s foreign exchange companies to divest their binary options divisions after binary options trading was banned in Israel. Selling their assets outside Israel “caused them gains,” Perlmutter said.

And in 2005, Israel passed legislation forcing the country’s banks to sell off their mutual fund businesses, said Binyamin Tovi, partner in charge of international taxation at Shekel and Co. law firm in Tel Aviv. The transaction was taxable because “the players that bought these funds were different players which had nothing to do with the banks,” he said.

“If the same will apply in this case and they will create a company with only infrastructure, which will provide infrastructure for the many players in the communications market, then I don’t think they will be able to do it on a tax-free basis,” he said April 18.

Exemptions Possible?

The spinoff could be exempt from tax if it meets criteria set out in sections 103-105 of the Israeli tax ordinance relating to mergers and acquisitions, said Yitzchak Chikorel, partner and head of international taxation at Deloitte in Tel Aviv.

“Such a process requires a pre-approval from the tax authorities and may also impose some restrictions and conditions on the companies and the shareholders,” Chikorel said by in an April 17 email.

A taxpayer or company transferring an asset into a new company in which it has a 90 percent interest can do so tax-free under certain conditions, in line with Section 104a, Tovi said. Following this part of the code, for a period of two years the new company is unable to sell the asset, and Bezeq would be unable to sell its shares in the new company during that time.

“There are some other technical conditions. If you comply with the conditions you will be eligible for tax-free restructuring,” Tovi said.

‘This is Different’

But the two-year hiatus would seem to undermine the government’s aim in breaking up Bezeq to immediately increase competition, he said. The event is mostly going to be taxable, he said.

“If the purpose is eventually to get to a situation where the infrastructure is held by a totally different player—not Bezeq or any other communications company but a different player and different shareholders—I do not think that the spinoff rules which exempt from tax will be applicable,” he said. “The rationale in those spinoff rules is that they allow restructuring when it’s a group of companies—a merger or a restructuring within a single group with various subsidiaries. This is different from those kind of restructurings because the infrastructure will go out from Bezeq to another independent company held by other shareholders.”

The tax liability would likely be based on the capital gain from the sale of Bezeq’s infrastructure assets compared to the cost base plus depreciation when the company was first privatized in 2005, Tovi said.

With assistance from Yaacov Benmeleh (Bloomberg)

To contact the reporter on this story: Matthew Kalman in Jerusalem at correspondents@bloomberglaw.com

To contact the editor responsible for this story: Penny Sukhraj at psukhraj@bloombergtax.com

Copyright © 2018 The Bureau of National Affairs, Inc. All Rights Reserved.

Request International Tax