Asset Purchase vs. Share Purchase in Israeli M&A
In the Israeli M&A landscape, the vast majority of transactions are structured as share purchases, with buyers acquiring the entire issued share capital of the target company. This dominance of share purchase deals is notable, despite several compelling advantages for asset purchase structures that are sometimes overlooked.
Depending on the type of assets purchased, asset purchase structures can be simpler and faster to execute, typically requiring a shorter due diligence process and not necessitating the involvement of minority shareholders. Buyers can select which assets and liabilities to acquire, leaving behind unwanted or historical liabilities in the target entity, eliminating most of the risk for hidden legacy liabilities. Additionally, asset purchases can save buyers the costs associated with maintaining an Israeli-based entity and may simplify post-closing integration.
Despite these advantages, share purchase transactions remain the prevailing structure in the Israeli market. While transferring third party contracts and employees can sometimes make asset purchase agreements difficult to execute, the main reason for preferring share purchase structures is the sellers’ tax considerations. In a share purchase, the proceeds are paid directly to the selling shareholders and are generally subject to a single level of tax (usually CGT). In contrast, asset purchase transactions can trigger double taxation: first, at the level of the target company on the gain from the sale of its assets (CIT), and then again when the proceeds are distributed to the shareholders (as a regular dividend or as a liquidation dividend). Moreover, for non-Israeli resident sellers or certain exempt entities, share sales may even be exempt from Israeli capital gains tax, further enhancing the tax efficiency of share purchase transactions structure.
However, the sellers’ tax considerations should not always be the decisive factor. Where the buyer intends to transfer the acquired business activity or assets outside of Israel post-closing, the tax disadvantages of a share purchase can become more pronounced. Specifically, if a non-Israeli buyer acquires shares and subsequently transfers assets or functions (such as IP, contractual rights, or employees) to another group company, this post-closing restructuring may itself be treated as a taxable event for the Israeli target company. The Israeli tax authorities have issued strict guidelines on such business restructurings, focusing on the transfer or elimination of functions, assets, and risks (FARs), and may impose significant tax liabilities based on transfer pricing principles. The tax authorities may, for example, conclude from the purchase price of a share purchase transaction for the calculation of the value of any assets or functions that are transferred from the target company post-closing (after making the necessary adjustments).
In these scenarios, the tax advantages of an asset purchase where the buyer acquires only the desired assets and can directly integrate them into its global operations may outweigh the double taxation concern. When combined with the other benefits of asset purchase structures, such as the ability to avoid historical liabilities and streamline integration, an asset purchase may be the preferable structure for buyers with post-closing cross-border plans.
