Last month's state tax revenues report included a "one-time amount of NIS 1.2 billion from a capital gain on a sale of a large company." The Israel Tax Authority declined to provide particulars about the deal involved, but the capital market believes that it refers to the sale of Keter Plastic in July 2016, in which brothers Sami and Yitzhak Sagol sold 80% of the company to BC Partners for $1.4 billion. Controlling shareholders currently pay 30% capital gains tax on their profit.
If the Keter deal boosted state tax revenues and rated its own special line in the state report on tax revenues, what will the Mobileye(NYSE: MBLY)-Intel deal do to the state treasury? Should the Tax Authority break out the champagne?
According to the estimates, the lower bound of the tax to be paid to the state following the deal will be NIS 4 billion, and the upper bound is NIS 14 billion. Most of the tax liability applies to the Israeli shareholders in the company.
Mobileye has three Israeli shareholders classified as parties at interest: the two founders, chairman Prof. Amnon Shashua and CEO Ziv Aviram, and Colmobil auto agency (importer of Mercedes, Hyundai, and Mitsubishi cars) controlling shareholder Shmuel Harlap, who owns Mobileye shares both personally and through Colmobil. The company also has many "small" Israeli investors.
By law, the current tax rate on capital gains is 25% for someone who is not a substantial shareholder (10% or more) in a company and 30% for a substantial shareholder. The tax calculation in the Mobileye deal is more complicated, however, since different capital gains tax rates applied in earlier years.
Former Income Tax commissioner Adv. Tali Yaron-Eldar, a partner in the Yaron-Eldar, Paller, Schwartz & Co. law firm, explains, "The tax rate in the deal varies from 25% to 30%, depending on the answers to the following questions: whether there are shareholders in the company who own more than a 10% stake, in which case their tax rates are higher, and the date on which the company was founded. If the company was founded before 2003, it increases the tax rate."
Shashua and Aviram founded Mobileye in 1999, so the tax calculation will be a little complicated. The calculation will be linear, because the tax rates in previous years were different.
Yaron-Eldar says, "The fact that the company was founded in 1999 increases the tax rate by about 3% for both the controlling shareholders and those who are not controlling shareholders. So we are already at about 28% tax on this deal, which they have to pay within 30 days of the deal date."
Yaron-Eldar adds that some of the foreign investors will also be taxed. "Non-Israeli shareholders will be taxed, because they are selling an Israeli company, except for those who received an exemption. Up until recently, someone who invested in a research and development company in Israel received an exemption on the sale of shares. Investors who bought shares on the stock exchange did not get an exemption because of their investment in R&D companies. There are also investors from countries with which Israel has a tax convention, such as the US, Switzerland, and countries like that; these conventions state that a sale of shares is tax exempt. Even with all the exemptions for foreign investors, there's about NIS 4 billion in taxes, however, a very large sum that cannot be ignored."
Another tax expert familiar with the company says that most of the foreign investors will not be taxed, because most of them have an exemption. "There are international car companies and foreign funds, such as Goldman Sachs, among the large foreign investors, and they will not be taxed. Israel will probably not receive a double-digit tax rate here, but in the end, the amount of tax will be very substantial. The sums are enormous. The two founders jointly hold almost 15% of the shares, and 15% of $15 billion is over $2 billion, on which they will pay at least NIS 2-3 billion in taxes. We also have Harlap, who has to pay taxes tax on both his personal holdings, and Colmobil, which will pay 24% corporate tax, so there's a nice sum for the state here, too."
This tax expert adds that the tax that will be paid following the deal, however significant, is not the real tax story. The company will continue to pay regular taxes on its business in Israel, and the company will provide both direct and indirect revenue for the state.
"The point of the deal is not the tax; the point is that everything is staying in Israel. The company's business will generate billions, because it's a company growing at an insane rate and making hundreds of millions of dollars in revenue. All of this will be taxed in Israel, which is what makes it great. The thousands of employees in Israel will also pay taxes. We have to keep in mind that this is one of the most amazing companies in the world, and it's here, and that's immensely significant for the state treasury," the expert concluded.
Published by Globes [online], Israel Business News - www.globes-online.com - on March 13, 2017
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