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Hybrid financial instruments ‐ Amendment 185 to the Income Tax Act

On 3.8.2011, amendment 185 to the Income Tax Act was approved by the Knesset (the Israeli Parliament).

In this framework, the article that regulates tax consequences of loans extended by a company to its control holders was amended. Following the amendment, loans extended to a company by its subsidiary were excluded from this article, even if these loans were given or received outside Israel's borders. Following this amendment, loans between a company and its subsidiary, including international loans, are treated by other clauses, as explained below.

* Regarding loans received by a company from its subsidiary, prior to the amendment the subsidiary was obliged to collect interest at a minimum rate of 4% + Cost of Living Index ("COL") linkage. Following the amendment, lower interest (3% with no requirement of COL linkage) was determined as minimum rate to be charged.

* Additionally, prior to the amendment, the companies involved could decide whether to register the financing revenue as notional benefit of the mother company (if interest was not charged) or, if the subsidiary charged interest, to register the financing revenue in its books. This mechanism enabled the taxpayers to appropriate the revenue to the company that had compensable losses. Following the amendment, this mechanism was neutralized and the loan giver is required always to record the financing revenue according to the amended clause.

* Finally, another clause was amended to determine that interest‐free loans extended by a company to its subsidiary for a period of at least 5 years, should be treated as capital investment and therefore exempts them from the clause. However, the difference between the original sum of the loan and the amount repaid, due to linkage to the relevant currency rate will be considered capital gains/ losses.

• The amendment will apply to loans extended from 1.1.2008.

For further information please contact Nissim Gai, CPA, partner at This e-mail address is being protected from spambots. You need JavaScript enabled to view it  
Gai, Goffer, Yahav, Guilman, Udem, Udem & Co
Phone: +972‐3‐5622282

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