CHAPTER FOUR: SPLITS OF COMPANIES,
COOPERATIVE SOCIETIES AND NONPROFIT SOCIETIES

Definitions
105. In this Chapter
"company" including a trust fund or a nonprofit society (amuta)
incorporated in Israel under the Amutot (Nonprofit Societies) Law;
"adjusted reports" financial reports drawn up and adjusted in accordance
with statements by the Israel Institute of Certified Public Accountants and
audited by a certified public accountant or by an audit union official, within its
meaning in section 131;
"holding company" a company, all assets of which are rights in
companies, or assets which under a statute cannot be transferred, and which
has no income except income derived from the dividend distributions or from
assets which under an statute cannot be transferred;
"continuing split company" a split company which is not a holding
company, and from which not all its assets and obligations were transferred.

Procedure of split
105A. A split may be carried out in one of the following ways:
(1) the transfer of assets and obligations from the split company to a new
company, which was established for purposes of the split, and in which
the rights are held by the same owners as the rights in the split
company, each holding a part of the new company that is identical with
his part of the split company;
(2) the transfer of assets and obligations from the split company to a new
company, which was established for purposes of the split, and which is
wholly owned by the split company.

Tax exemption
105B. (a) The cancellation of shares in a split company or a reduction of its 172
capital in a split under section 105A(1), and the transfer of the split
company's assets to the new company shall not be charged tax under
this Ordinance, under the Inflationary Adjustments Law or under the
Land Appreciation Tax Law, all if the requirements of this Chapter were
met.
(b) The sale of any asset, which is not charged Land Appreciation Tax
because of the provisions of subsection (a), shall be charged
acquisition tax at the rate of 0.5% of its value.

Conditions of entitlement
105C.(a) The benefits under this Chapter shall apply to a split, if all the following
hold true:
(1) the company proposes to split for a business and economic
purpose, improper tax avoidance or a reduction of tax not being
among the main objectives of the split;
(2) most of the assets that remain in the split company and most of
the assets transferred to the new company as part of the split are
not sold by either of them during two years after the date of the
split, and during the said period use of them is made in the
course of the company's business, in a manner customary under
the circumstances; for this purpose: "assets" and "most of the
assets" within their meaning in section 103C(2), but its rights in
the new company shall not be included in the calculation of the
split company's assets in a split under section 105A(2);
(3) the main economic activity, which the split company carried on
during the two years before the date of the split, is continued
during two years after the date of the split in the new company or
in the continuing split company;
(4) the new company and the continuing split company have
independent economic activities, the income from which is liable
to tax under section 2(1), and which stems from the activity of the
split company, and if the split company is a nonprofit or
cooperative society, then the activity of the nonprofit or
cooperative society is continued in it or in the new company, as
the case may be;
(5) the split company and the new company are one of the following:
(a) an Israel resident incorporated in Israel under the
Companies Ordinance, the Companies Law, the
Cooperative Societies Ordinance or the Amutot Law;
(b) a company approved by the Director for this purpose, which
is a foreign resident company or an Israel resident foreign
company, as defined in the Companies Ordinance or the
Companies Law; aforesaid approval may be conditional on
the provision of guaranties and on other conditions, as the
Director may prescribe;
(6) (a) the value of the assets transferred from the split company
to each of the new companies in the course of the split, or
those left in the continuing split company, shall not be less
than 10% of the value of the split company's assets, all
according to the value specified in the returns adjusted as
of the date of the split; for this purpose the rights of the
split company in the new company shall not be included in
the calculation of the split company's assets in a split under
section105A(2); 173
(b) immediately after a split under section 105A(1), the market
value of one new company shall not exceed the market
value of another new company more than four-fold, and if
the split company is a continuing split company, then the
market value of each new company shall not exceed the
market value of the split company more than four-fold and it
shall not be less than one fourth of the market value of the
split company;
(c) the Director may, on the company's application and for
reasons that shall be recorded, prescribe that the split
company divide its assets otherwise than said in
subparagraphs (a) or (b), if it was proven to his satisfaction
that their provisions are liable to have an adverse effect on
the objectives of the split, all on conditions that he may
prescribe;
(7) (a) In a split under section 105A(1) and in the case of a
continuing split company, the shareholders in each of the
new companies shall immediately after the split and
during two years after its date have the same rights that
they had in the split company and the same part of each of
the rights, all immediately after the date of the split;
(b) in a split under section 105A(2), the split company shall
hold immediately after the split and during two years after
the date of the split all the rights in the new company;
(c) holders of rights that are traded on an exchange shall not
for purposes of subparagraph (a) be included in the count
of holders of rights, unless they were controlling members
on the date of the split; for this purpose: "controlling
member" other than a benefit fund and a trust fund;
(8) notwithstanding the provisions of paragraph (7), if one of the
following occurs it shall not be deemed a change in rights after
the split, on condition that at no time during the two years after
the date of the split the rights of the persons who held the rights
immediately after the split drop to less than 50% of each of the
rights in each of the new companies and in the split company, as
the case may be:
(a) one or more of the holders of rights sells voluntarily less
than 10% of any of the rights he holds, or he sells a greater
percentage with the agreement of the other shareholders,
on condition that all the rights sold by all holders of rights
do not exceed 10% of all the rights in the company before
allocations to persons who did not hold rights in the
company before the split;
(b) new rights are allocated to persons who did not hold rights
in the company before the allocation;
(c) shares defined in section 102 are offered to the general
public on an Exchange by prospectus, which states that the
Exchange agreed to list the shares for trading on it;
(d) repealed
(8a) notwithstanding the provisions of paragraph (7) and in addition to
the provisions of paragraph (8), an involuntary sale of rights shall
not be deemed a change in the rights after the split;
(9) the date of the split shall be at the end of the tax year;
(10) no cash payments or additional consideration of any other kind 174
passed between the holders of rights in the split company as part
of the split;
(11) during two years after the date of the split there are no transfers
of cash or of assets, no provision of guaranties or other activity
between the new companies 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 obligations
in each of the new companies and in the split company, as the
case may be, in accordance with adjusted reports as of the date
of the split;
(13) the plan for the split was approved by the Director before the
split, as said in section 105H(b);
(14) if the new company or the split company is a real estate
association and if land was transferred to a new company if
construction of a building was completed on that transferred land
within four years after the split according to conditions to be set
by the Director;
(15) if the split company is a trust fund, then it may split only into trust
funds of the same category as the split company.
(b) The Minister of Finance may, with approval by the Knesset Finance
Committee, prescribe additional conditions and rules for implementation
of the split, and he may designate categories of splits that do not
require the Director's approval, as said in subsection (a)(13).

Division of obligations and profits
105D. (a) The obligations of the split company shall be divided among the new
companies, or between the continuing split company and a continuing
new company, as the case may be, according to the following rules:
(1) obligations that do not constitute equity under section 1A of
Schedule One to the Inflationary Adjustments Law, and which
can be related to a specific asset or a specific activity, shall be
allocated to the company that holds that asset, but no obligation
shall be related to an asset if it exceeds of the value of that asset,
all according to adjusted reports as of the date of the split;
(2) the balance of obligations, which was not allocated as said in
paragraph (1), shall be allocated according to the ratio between
the value of assets in that company to the total value of assets in
the split company before the split, according to adjusted reports
as of the date of the split; for this purpose: "value of assets"
the value of assets, less obligations related as said in paragraph
(1), and less the value of rights which a split company holds in a
new company.
(b) The losses of a continuing split company under sections 28 and 92, as
the case may be, shall be divided among the new companies or
between the continuing split company and the new company in
proportion to the ratio of their equities (hereafter: equity ratio), on
condition that losses under section 28(h) be in the company that holds
the asset from which the loss stems; for the purpose of this section:
"equity" the amount by which the value of a company's assets, less
the value of rights which a split company holds in a new company,
exceeds the value of obligations allocated to the company as said in
subsection (a), all according to reports adjusted as of the date of the
split. 175
(c) Profits available for distribution, within their meaning in section 94B
(1) shall be divided in a split under section 105A(1) between the
continuing split company and the new company or between the
new companies, as the case may be, according to the equity
ratio;
(2) shall remain in the split company, in a split under section
105A(2);
(3) the Director shall make rules on their calculation.
(d) Repealed
(e) A deduction because of inflation, within the meaning of section 7 of the
Inflationary Adjustments Law, shall be divided according to the equity
ratio, but an aforesaid deduction, which under section 7(e) of the said
Law relates to a work unit, as defined in section 18(d), shall be in the
same company as the work unit.
(f) Notwithstanding the provisions of this Ordinance, if a split company
under section 105A(1) owns an approved enterprise, within its meaning
in the Investment Encouragement Law, and if at the time of the split the
company is able to distribute a dividend under sections 47(b)(2) or
51(c) of that Law, then that part of the dividend shall be charged to tax,
which does not exceed the excess of assets transferred to the new
company at the time of the split as said in the aforesaid sections, as the
case may be, as if it had been distributed.
(g) Obligations, contingent obligations, income, expenses, deductions and
so forth, which did not appear in the reports of the split company at the
time of the split and which stem from its activity before the split shall be
divided between the split company and the new company or between
the new companies, as the case may be, according to the Director's
instructions.

Setting off losses of a split company
105E.(a) A loss said in section 28, which a split company suffered up to the date
of the split, which was transferred to each of the companies as said in
section 105D(b), and which may be carried forward to future years, may
be set off against the income of the new company or of the split
company, as the case may be, beginning with the tax year after the
split, but in each tax year each company shall be allowed to set off an
amount no greater than 20% of the total of the said loss, or 50% of
chargeable income of the company where it is, before the set off of that
loss, whichever is the smaller amount; in respect of this subsection and
of subsection (c)(1): "chargeable income" before the deduction of
losses, but without income against which a loss was set off under
section 92.
(b) A loss said in section 92, incurred by a split company up to the date of
the split and transferred to one of the companies as said in section
105D(b), and which can be carried forward to subsequent years, may
be set off against a capital gain of the new company or of the split
company, as the case may be, beginning with the tax year after the
split, but in each tax year each company shall be allowed to set off an
amount no greater than 20% of the total of the said loss, or 50% of
capital gain in that company before the set off of that loss, whichever is
the smaller amount; a period of five years after the day of the split shall
not be taken into account for the time limit set in section 92 for setting
off an aforesaid loss.
(c) (1) If a loss or capital loss said in subsections (a) or (b) cannot be set 176
off in that year because of the limitation of 50% of chargeable
income, then it may be set off successively in the following years,
on condition that no loss said in this paragraph be set off which,
together with the loss said in subsection (a), exceeds 50% of the
company's income before the set off of losses from preceding
years.
(2) If a loss said in subsection (b) could not be set off in that year
because of the limitation of 50% of capital gain, then it may be
set off successively in the following years, one after the other, on
condition that no loss said in this paragraph be set off which,
together with the loss said in subsection (b), exceeds 50% of the
company's capital gain before the set off of losses from
preceding years.
(d) A loss or capital loss, which could not be set off as said in subsections
(a) to (c) until the end of the fifth year after the date of the split, may be
set off beginning with the sixth year, subject to the provisions of
sections 28 and 92, as the case may be.
(e) Notwithstanding the provisions of subsection (a), a loss sustained by a
split company before the split from renting a building may be set off
under the provisions of section 28(h).
(f) The Director may prescribe restrictions on the set off of a loss or of a
capital loss, if he is satisfied that the split will result in an improper
reduction of tax because of the set off; however, if the split company
requested the Director's advance certification, then the Director must
inform it of his decision under this paragraph together with his
notification of that certification; a decision under this paragraph may be
appealed, as if the Director had withdrawn a certification said in section
103J(g).
(g) If, at the time of the split, a split company and a new company assumed
a written obligation before the Director that their ownership will not
change within two years after the day of the split, then they shall not be
restricted under this section in setting off losses; an undertaking said in
this subsection shall constitute a condition for the split, and its violation
shall be deemed a violation of one of the conditions specified in section
105C.
(h) In this section, "capital gain" including land appreciation.

Asset transferred in a split
105F. (a) When an asset has been transferred in a split, then its original cost, the
balance of its original cost, its cost of acquisition and its date of
acquisition, each as the case may be, shall be for purposes of this
Ordinance, of the Inflationary Adjustments Law and of the Land
Appreciation Tax Law, as they would have been in the split company if
the asset had not been transferred, and the new company shall be
allowed, at its sale, the deductions that would have been allowed the
split company if it had sold the asset; in respect of an aforesaid asset,
which constitutes stock, its cost shall be the amount set as final stock
for purposes of the split company's assessment on the date of the split.
(b) The transfer of an asset in a split shall be deemed a sale for purposes
of the number of periods under section 21A of the Industry
Encouragement Law.

Profit from the sale of shares
105G When a person sells a share in a new company which was allocated to him at 177
the split (hereafter: the new share) or in a split company, and if rights in the
split company and in the new company were not listed on an Exchange for
trading on the day of the split, then the following provisions shall apply:
(1) in a split under section 105A(1), the original cost of the shares of the
new company shall be the proportional part of the original cost of the
shares of the split company, according to the equity ratio said in section
105D(b), adjusted at the rate of index increase from the day of
acquisition of the shares in the split company until the date of the split,
less any real loss that would have been incurred, if the proportional part
of the shares had been sold on the date of the split, on condition that it
is not less than the proportional part of the original cost of the shares in
the split company (hereafter: the adjusted cost); the differential between
the original cost of the proportional part of the shares in the split
company and the aforesaid adjusted cost is hereafter called the
"adjustment differential"; the original cost of the shares of the split
company shall be reduced in accordance with the equity ratio said in
section 105D(b); for this purpose: "real loss" the amount by which a
share's market value is lower than its adjusted original cost;
(2) in a split under section 105A(2), the original cost of the shares in the
new company shall be set according to the excess of assets transferred
to it, less any real loss that would have been incurred, if the assets and
obligations had been sold together on the date of the split (hereafter:
the adjusted cost); for this purpose:
"adjustment differential" the differential between the balance of the
original cost of the transferred assets and the adjusted balance of their
original cost;
"excess of assets" the excess of the balance of the adjusted original
cost of assets over obligations, according to the adjusted reports as of
the day of the split;
"real loss" the amount by which the market value of assets and
obligations, which are transferred together, is smaller than their
adjusted original cost, less the obligations;
(3) an adjustment differential said in paragraphs (1) and (2), which
constitutes part of the original cost of the sold shares, shall be added to
the consideration from the sale of the shares, as the case may be, and
it shall be deemed an additional inflationary amount;
(4) the date of the split shall be deemed the date of acquisition of the
shares in the new company, but for the calculation of the real capital
gain until the determining date, the day on which the shares of the split
company were acquired shall be deemed the day of acquisition of the
shares of 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 if at the sale of the shares of the
new company he requests that the exchange rate at which he acquired
the shares of the split company be deemed the index for calculation of
the adjusted price, then the adjustment differential shall be exempt of
tax.

Miscellaneous provisions
105H.(a) The provisions of sections 103G, 103I to 103L and 103N to 103S shall
apply, mutatis mutandis, as the case may be, to a split and for this
purpose, wherever there it says
(1) "merger", read "split";
(2) "date of merger", read "date of split"; 178
(3) "transferor company", read "split company";
(4) "merged company", read "new company";
(b) Notwithstanding the provisions of section 103I, the benefits said in
section 105B shall not be given if the Director's approval was not
obtained before the split; if the Director determined that a split does not
comply with the conditions in this Chapter, then his decision may be
appealed as if it were an Order under section 152.
(c) When a company has split, then if it is not a holding company the
provisions of section 130A shall apply to it and to the new companies
after the split, if that section applied to the split company before the
split.

Split to an existing company
105I. The Director may make rules, according to which the transfer of assets,
obligations and capital from a split company to a company that is not a new
company set up for that purpose, or the merger of a split company or of a new
company after the split, shall be exempt of tax as said in this Part, on
condition that the conditions specified in Chapter Two and in Chapter Four of
this Part apply, mutatis mutandis.
Authorization on structural changes in real estate associations
105J. The Minister of Finance may, with approval by the Knesset Finance
Committee, make regulations on the matters of sections 103M, 104A(b) and
(b1), 104B(a)(4), 104H and 105C(a)(14), and he may make the exemption
under them subject to conditions, including the change of periods and
conditions prescribed in the said sections, and he may also prescribe
circumstances under which the provisions of the said sections shall not apply.


PART FIVE "C" (Sections 105K to 105S2): Repealed