Treasury can expect tax bonanza from Wiz sale

How much of the $23 billion reported by Alphabet (Google’s parent company) to buy Israeli cloud security startup Wiz will the Israeli tax authority take? The low estimate is $2.5 billion, while the high estimate is $3.5 billion.

The Israeli tax liability arising from the acquisition lies with Waze’s Israeli shareholders. Waze’s founders — Assaf Rappaport, Ynon Kostika, Ami Luttwak, and Roy Resnick — are believed to each own 10% of the company’s shares. The remaining shares are largely held by non-Israelis, including Sequoia Capital, Index Ventures, Insight Partners, Andreessen Horowitz, and LVMH CEO Bernard Arnault.

“The company’s development center is in Israel, but it is registered in the United States and headquartered in New York,” said attorney and public accountant Racheli Goz Lavi, a tax specialist at Amit Polak Matalon & Associates. “Therefore, foreign investors in the company, including foreign venture capital firms, will not bear any tax liability in Israel. However, the founders and investors who are residents of Israel, and the Israeli employees who have received options, will still pay a significant amount of taxes.”

“If we assume that this is a cash transaction worth $23 billion, and if we assume that 40-45% of the direct and indirect shareholders are Israelis residing in Israel for tax purposes, then the State of Israel will collect a very large sum in taxes, which could reach several billion dollars, which is excellent news for the Ministry of Finance and the Israeli people,” added attorney Lior Ne’aman of S. Horowitz & Co.

“In general,” explains Naaman, “capital gains from the sale of shares by residents of Israel are taxed at a rate of 28% (25% plus 3% additional tax), and when the seller is defined as a major shareholder, whose holding at the time of the sale or at any time during the preceding 12 months was 10% or more of the company’s shares, the tax rate increases by 5% to 33%, hence the large difference between holding 9.9% and holding 10% plus. In general, capital gains taxed are measured as the difference between the purchase price of the shares, adjusted for changes in the consumer price index, and the sale value.”

“A major shareholder is anyone who owns 10% or more of a company’s shares,” says attorney Yaniv Shekel, a tax specialist at Shekel & Co. “So if the founders fall within this definition, the amount of tax the state will collect from them alone could exceed $3 billion. But even by conservative calculations, the state will derive a significant amount of tax revenue from the deal.”

“Assuming that no shareholder owns 10% or more, and that foreign shareholders and funds are exempt from tax, the tax rate for Israelis would be 28%. For Israelis who own 40% of the shares in total, the tax due would be just over $2.5 billion. Assuming a 50% tax rate, the tax due would be about $3.2 billion.

“The valuation in the deal is a huge jump compared to the financing rounds, so I assume there is no significant cost of equity that would reduce the tax burden on Israelis,” Shekel adds. “Moreover, in a company like this that is still essentially a startup, employees are likely to have a significant share of it in options.”

“It can be assumed that the purchase basis for a significant portion of the holdings of the founding shareholders is negligible, and therefore the entire proceeds will be taxable at the stated rates, whereas for shares issued/issuable in respect of option packages granted to the founders who are working in the company and employees who participated in the company’s employee stock option plan, the purchase basis for the shares is the exercise price of the options, which will generally be higher, and depends on the date of issuance of the options in relation to the company’s financing rounds,” Nauman further explains.

“Although the foreign funds that make up the majority of the investors are tax-exempt as partnerships, and the individual partners in the funds are taxed, since the vast majority of investors in foreign funds are supposed to be foreigners and therefore tax-exempt in Israel, Israeli investors who invested through these funds would pay a 28% tax. The funds are transparent for tax purposes, and are not subject to tax in their place of residence. For example, an Israeli investor who invested through the US-based Insight Partners fund would pay tax in Israel and not in the US, and some foreign funds have raised money from Israeli investors over the years.”

This article was published in Globes, Israeli Business News – en.globes.co.il – on July 15, 2024.

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