"Globes"' exclusive report yesterday that Google Inc. (Nasdaq: GOOG) will acquire Waze Ltd. has generated estimates that the Israel Tax Authority could see NIS 1 billion in tax revenues from the sale. An investigation by "Globes" has found that such a figure is far from the actual revenues that the state will see. The study found that tax revenues from the sale will be NIS 200-600 million, and possibly less.
The reason is that most Waze shareholders are foreign funds and companies, which do not pay taxes in Israel.
Tax Authority legal adviser Adv. Moshe Mizrahi says, "Estimates about the tax payment on the Google-Waze deal are overblown. On the basis of the holdings in Waze, the maximum that the Tax Authority can collect is NIS 600 million, and that assumes that investors in Magma Venture Partners and Vertex Venture Capital are Israelis. But we know that that is incorrect. Many of the investors in these funds are foreign residents and do not pay tax in Israel. The greater the proportion of foreign investors in Magma and Vertex, the tax the government collects shrinks. It seems that the taxes Israel will receive from the deal will be much less than reported."
When the Tax Authority collects the taxes on the Waze deal, it will find out that, according to the information at the Israeli Corporations Authority, 78% of Waze's shareholders are foreign residents. The company's investors include Vertex, which is registered in the British Virgin Islands; BlueRun Ventures is registered in the US; Magma is registered in the US; and Qualcomm Ventures is registered in the US; Kleiner Perkins Caufield & Byers is registered in the US; Microsoft is registered in Ireland; and Hong Kong tycoon Li Ka-shing, whose Horizons Ventures has invested in Waze, registers his companies in the US and British Virgin Islands.
Former Tax Authority official Adv. Eldad Noach, who is now in private practice, clarified the law, saying, "Under the Tax Code, a foreign resident, including companies, which invest in Israel, are exempt from taxes on the sale of shares. If we start from assumption that half of Vertex and Magma's shareholders are Israelis who pay taxes, an assumption which may be very far from reality, I estimate that the tax payment will be less than NIS 350 million, which is nowhere near NIS 1 billion. As I said, it is not certain that 50% of the investors in these funds are Israelis, so it's possible that the tax will be NIS 100-200 million from this deal. We arrive at a tax rate of just 8% on the sale proceeds, instead of 25% tax on the capital gain of the $1.1-1.3 billion."
The experts' analysis shows that the only individuals who will pay taxes in Israel are Waze's Israeli founders and investors, who own 20% of the company.
Adv. Eyal Shenhav says, "The tax rate will be 25-30% on the entrepreneurs who are Israeli residents. Anyone who owns more than 10% of the voting or other rights in the company, such as the right to appoint directors, will pay a higher tax rate of 30% in an extreme case, but most will pay the 25% capital gains rate. The Israeli employees will probably pay a 25% tax rate, assuming that the company has adopted an options plan, which is prevalent in the industry."
Shenhav estimates that assuming that Waze is acquired for $1.1 billion, the tax on the deal will total just NIS 50-60 million. "When calculating the holdings of the founders and employees, Arie Gillon, Uri Levine, Gili and Amir Shinar, and Ehud Shabtai, they own slightly less than 20% of Waze's shares, and they will pay a 25% tax rate. The tax on the deal will be $50-60 million, or about NIS 200 million, which is 5% of the sale proceeds."
Published by Globes [online], Israel business news - www.globes-online.com - on June 10, 2013
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