The Israeli Tax Authority recently published a tax decision (the “Decision”), which concerns the issue of liability for value added tax (VAT) with regard to the sale of shares, where the proceeds for such sale will be paid partly in cash and partly by way of  credit. In accordance with the Decision, the interest component and the linkage differentials, which derive from the credit component, will be subject to VAT as a taxable transaction, as described below.

As part of the transaction, which is the subject of this Decision (resolution no. 0599/19), Company A sold to Company B, shares it owned in Company C (the “Shares”). The share sale agreement stated that the consideration for the Shares will be paid partly in cash and partly by credit, with the portion attributable to credit, to be provided to the buyer as a loan, bearing interest which is linked (principal and interest), on an annual basis to any increase in the consumer price index.

The Decision states that the granting of credit by the seller to the purchaser for the purchase of the Shares, should be regarded as a separate transaction from the sale of the Shares. As a result, the Tax Authority decided as follows:

(1) In view of the fact that securities are excluded from the definition of “goods” under section 1 of the VAT Law, the sale of shares is not a “transaction”, as defined in the VAT Law and consequently, is not taxable.
(2) The consideration for providing the credit to the purchaser for the purpose of financing the purchase of the shares, including the interest component and linkage differentials received by the seller, is part of the price of the transactions that are subject to Value Added Tax by the seller, as stated in Section 7 of the VAT Law.
(3) In light of the “Matching Principle” set out in section 41 of the VAT  Law, the input tax included in the tax invoice, which the seller will issue to the purchaser in connection with the granting of the credit for the purchase of the Shares, is not deductible by the purchaser. The rationale is that the credit granted is used to purchase shares rather than to generate taxable transactions.

It should be noted that the position of the Tax Authority in the Decision, according to which two separate transactions are involved, one of which is the sale of shares and the other a loan differ from the literal and accepted interpretation of section 8 of the VAT Law, namely: “in a transaction that includes an asset and a service, the price of the transaction shall be all together”.

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