In 2005, a temporary order was added to the Income Tax Ordinance (ITO), within Section 97(B3) of the ITO, granting a foreign resident of a treaty country an exemption from capital gain tax upon the sale of securities of an Israeli company (or a foreign company whose assets are mostly in Israel). The said exemption applied only to securities that were acquired in the period from July 1, 2015 to December 31, 2008 (“the temporary order period”). The temporary order prescribed a number of additional conditions such as the duty of reporting when a security is purchased, conditions concerning required time period as a resident in the relevant treaty country and more.
Within an amendment of the ITO effective from January 1, 2009, aimed to expand and fixate the said exemption, the wording of the previous section was cancelled and the new version ruled that any foreign resident would be entitled to an exemption upon the sale of a security of an Israeli resident company, irrespective of the foreign resident being a resident of a treaty country/ The new clause provisions regarding entry into force state that it will apply to the sale of a security purchased on January 1, 2009 or later. Because there is no “grandfather clause”, it may be asked what is the legal situation regarding securities purchased in the period of the temporary order and sold after the amendment. It would seem that due to the cancellation of the previous clause in the above mentioned amendment, according to the provisions of the law as worded, a treaty country resident who purchased a security of an Israeli company in the period of the temporary order who is now interested in selling the security, will not be exempt from capital gain tax at the time of sale, even if he would have been exempt from it had he sold that security by December 31, 2008.
The commentaries to the law, which express the intent of the legislator in the said amendment, state that the purpose of the section is to encourage foreign residents to invest in Israel. It further states that to encourage foreign residents to invest in Israel, the provision of the law that limited investors only to treaty country residents was cancelled and the provision of the law that required the purchaser to immediately report on the purchase – was cancelled. It is clear to us that the intent of the legislator behind the said amendment was to encourage foreign residents to invest in Israeli companies, beyond the benefit given within the temporary order, and the commentaries also stated that: “Giving such an exemption in Israel will allow companies in Israel to compete with companies abroad over the investment of foreign residents”. However, the law itself and the commentaries do not answer the question of whether the exemption also applies to a foreign resident who purchased the securities before 2009. In our opinion, it is obvious that the purpose of the amendment was to continue the existing exemption while giving additional relieves to foreign residents for new purchased of securities, and therefore it is to be interpreted so that an exemption will also be given to those who purchased the securities in the period of the temporary order and according to the conditions prescribed therein, even if the securities were sold after it.