How much will the Israel Tax Authority take from the reported sum of $23 billion that Alphabet (parent company of Google) will pay for Israeli cloud security startup Wiz? The lowest estimate is $2.5 billion, while the highest is $3.5 billion.
The tax liability in Israel arising from the acquisition falls on the Israeli shareholders in Wiz. Each of Wiz’s founders - Assaf Rappaport, Yinon Costica, Ami Luttwak and Roy Reznik - is believed to hold 10% of the shares in the company. Most of the remaining shares are held by non-Israelis, among them Sequoia Capital, Index Ventures, Insight Partners, Andreessen Horowitz, and LVMH CEO Bernard Arnault.
Adv. and CPA Racheli Guz-Lavi , a tax specialist at Amit Pollak Matalon & Co., says, "The company’s development center is in Israel, but it is registered in the US and its head office is in New York. Therefore, foreign investors in the company, including foreign venture capital firms, will have no tax liability in Israel. Nevertheless, a large amount of tax will still be paid by the founders and the Israel-resident investors, and by the Israeli employees who have received options."
Adv. Leor Nouman of S. Horowitz & Co. adds, "Assuming that this is a cash deal amounting to $23 billion, and assuming that 40-45% of the direct and indirect shareholders are Israelis who are residents of Israel for tax purposes, then the State of Israel will collect a very substantial amount of tax, that could reach several billion dollars, which is excellent news for the Ministry of Finance and the Israeli people.
"In general," Nouman explains, "capital gains on the sale of shares by resident of Israel are liable to tax at a rate of 28% (25% plus 3% surtax), and when the seller is defined as a substantial shareholder, whose holding at the time of the sale or at any point in the twelve months preceding it was 10% or more of the rights in the company, the tax rate rises by 5% to 33%, hence the dramatic difference between a holding of 9.9% and one of 10% plus. In general, the capital gain on which tax is imposed is measured as the difference between the buying price of the shares, adjusted for changes in the Consumer Price Index, and the value of the sale."
Adv. Yaniv Shekel, a tax specialist at Shekel & Co., says, "A substantial shareholder is anyone who holds 10% of more of the shares in a company, so if the founders come within this definition, the amount of tax that the state will collect from them alone could exceed $3 billion. But even on a conservative calculation, the state will derive a large amount of tax revenue form the deal.
"Assuming that none of the shareholders holds 10% or more, and that the foreign shareholders and funds are exempt from tax, the tax rate applicable to the Israelis will be 28%. On Israelis holding 40% of the shares in aggregate, the tax payable will be a little over $2.5 billion. At 50%, the tax payable is about $3.2 billion.
"The valuation in the deal represents a huge jump in comparison with the financing rounds, so I presume that there is no significant cost of the shares that will reduce the tax on the Israelis," Shekel adds. "Furthermore, in a company like this that is still basically a startup, the employees probably have a significant slice of it in options."
Nouman further explains, "It can be assumed that the purchase basis of a large part of the holdings of the founding shareholders is negligible, and so the entire proceeds will be liable to tax at the rates quoted, whereas for shares issued/due to be issued in respect of options packages awarded to the founders working at the company and the employees who have participated in the company’s ESOP (employee stock options plan), the purchase base of the shares is the exercise price of the options, which in general will be higher, and dependent on the date the options were issued in relation to the company’s financing rounds.
"Although the foreign funds that constitute most of the investors are exempt from tax as partnerships, and tax is imposed on the individual partners in the funds, with the vast majority of the investors in the foreign funds presumably being foreigners themselves and therefore exempt from tax in Israel, those Israeli investors who have invested via these funds will pay tax at 28%. The funds are transparent for tax purposes, and are not taxed in their place of residency. So, for example, an Israeli investor who invested via the US-based Insight Partners fund will pay tax in Israel and not in the US, and some of the foreign funds have raised money from Israeli investors over the years."
Published by Globes, Israel business news - en.globes.co.il - on July 15, 2024.
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