Sources inform ''Globes'' that, when it acquired the controlling interest in Tnuva Food Industries Ltd. in 2008, Apax Partners insisted on receiving a full tax exemption from the Israel Tax Authority on gains from a subsequent sale of the company, as a precondition. If Apax were to sell control of Tnuva today, the tax it would save on the deal is reportedly in the tens or even hundreds of millions of shekels. Since Tnuva's valuation has almost doubled within three years, the added value is around $1 billion.
Tax experts say that there is nothing unusual in granting a capital gains tax exemption to a foreign investor. They say that a foreign investor in an Israeli company is eligible for an exemption on the sale of the holding.
A Tax Authority source said that this has been its stated policy since 2008, in order to encourage foreign investment. "Even before then, exemptions were given to foreign funds that invested in Israel, subject to certain conditions," he said.
There is an exception to the exemption: it is not granted, and cannot be granted, to Israeli citizens and residents, or to companies registered in Israel, all of which must pay the prevailing taxes on profits from a company's regular operations and on capital gains on the sale of shares in the company.
According to the source familiar with the Apax-Tnuva deal, "Apax falls precisely on this point." This is because Apax and Mivtach Shamir Holdings Ltd. (TASE:MISH) acquired Tnuva through Israeli companies set up for the purchase of the acquisition.
Apax and Mivtach Shamir acquired Tnuva for NIS 1 billion. They acquired 76.8% of Tnuva through a special purpose vehicle (SPV), in which Apax owns 73%, and Mivtach Shamir owns 27%.
Mivtach Shamir has been in talks to sell its Tnuva stake to Bank Leumi (TASE: LUMI) and other partners. In the latest structure of the proposed deal, Mivtach Shamir will sell 20.7% of Tnuva by selling its 27% stake in the SPV for NIS 775 million. Bank Leumi will pay NIS 387.5 million for 13.5% of the SPV, giving it a 10.35% stake in Tnuva. Mivtach Shamir will sell the other SPV shares to private investors.
Tax experts say that when Tnuva is sold through the SPV, which is an Israeli company, Apax should not be eligible for the capital gains tax exemption. A leading tax expert says, "If a foreign company sets up an Israeli corporation to acquire another Israeli company and subsequently sells the company via the Israeli corporation, it will not be tax exempt. It is hard for me to see anyone approving a sweeping exemption for Apax if its shares in Tnuva are sold by the Israeli corporation."
A Tax Authority official, who was involved in formulating the tax structure for the sale of Tnuva to Apax, explains why the Tax Authority had no problem in giving a tax exemption to Apax. "The Israeli corporation that made the acquisition was only established for technical reasons, and for practical purposes Apax owns the holding in Tnuva. The Tax Authority therefore considers Apax as the direct owner of the controlling shares in Tnuva and as eligible for an exemption accruing to Apax's investors, who are considered limited partners."
In a presentation to Apax partners in March 2011, Apax Israel CEO Zehavit Cohen stated that Tnuva's value was NIS 7.8 billion. She presented figures indicating that Apax's tax break from the Tax Authority on the sale of its shares amounted to at least several tens of millions of shekels.
Apax Partners said, "The tax exemption given to Apax Partners carries no benefit beyond what is granted to every foreign investor in the State of Israel. Like any foreign investor, Apax is exempt from capital gains taxes. Use of an SPV to acquire companies is normal practice in Israel and is approved by the Tax Authority and is mainly at the behest of the banks, which will not extend loans without the establishment of an SPV. Because of the need to use an SPV, the Tax Authority gives approval in advance of a tax exemption for the fund, confirming the exemption for foreign investors."
The Tax Authority said in response, "Because of the duty of confidentiality in the in tax laws, we cannot comment on the matter."
Published by Globes [online], Israel business news - www.globes-online.com - on June 28, 2011
© Copyright of Globes Publisher Itonut (1983) Ltd. 2011