In short
A private company can become public by merging with a listed company or a public "shell", saving some of the cost and complexity of an IPO. Such a merger is in principle a taxable event, but the Israeli Income Tax Ordinance offers two routes for deferring the tax: Section 103K, which has more conditions but no deadline for selling the shares, and Section 104H, which is more flexible but requires the tax to be paid within 24 and 48 months.
An IPO is a long and expensive process, involving many advisers and complex requirements. That is why some private companies take a shortcut: a merger with a public company. The merger can be with a company that has an active business or, in some cases, with a public "shell" company with no operations, and in this way the private company effectively becomes a public company itself.
A merger like this is in principle a taxable event, and in many cases the amounts involved are significant.
The Israeli Income Tax Ordinance offers two main routes for deferring the tax, and the difference between them can make or break the deal:
A merger under Section 103K
- Requires a strong business purpose
- Requires the losses in the public shell to be written off
- Requires a set value ratio between the companies
- Limits the cash component of the consideration to 49%
- The big advantage: there is no deadline for selling the shares. You sell when it makes business sense, not when tax dictates.
A share exchange under Section 104H
- No business purpose requirement
- No value ratio requirement
- No limit on the cash component
- The main drawback: the tax on half of the shares must be paid within 24 months, and on the rest within 48 months. Sometimes the shares will have to be sold to fund the tax liability. A further drawback is that the shares are deposited with a trustee on behalf of the Israel Tax Authority until they are sold.
On paper, 104H looks simpler. In practice, it brings a speculative element into the equation: you may want to hold the shares for the long term, but the forced tax event will require you to sell, possibly just when the share price is at a low.
The Bottom Line
There is no single "right" route. The choice depends on the deal structure, the consideration, accumulated losses and your plans for the shares on the day after. This is a decision worth making before signing, not after. Considering a merger with a public company? Let's think it through together.