Israel: Financing structure used in M&A transaction was artificial arrangement to avoid tax on repatriation of local profits (District Court decision)

The Central District/Lod District Court on July 28, 2026, held that the financing structure used to acquire an Israeli company was as an artificial arrangement to avoid tax on the repatriation of local profits.

The case is: Q Cyber Technologies Ltd. v. Kfar Saba Tax Assessor.

Summary

A U.S. private equity fund sought to acquire an Israeli company and structured a multi-step acquisition through a Luxembourg holding company and the Israeli taxpayer. In early 2014, the parties signed the acquisition agreement. Roughly 70% of the target company was acquired by the Israeli taxpayer using a loan of approximately $70 million, and the remaining 30% was acquired through an allocation of the target company's shares. Over the years 2014 through 2018, more than $86 million of the target company's profits were transferred out of Israel to the foreign parent through a combination of loans and dividends, largely without Israeli tax being paid.

The Israel Tax Authority (ITA) argued that the loan arrangement was, in substance, a mechanism to distribute the target company's profits abroad while avoiding the 10% dividend withholding tax, the rate set under the Israel-Luxembourg tax treaty, and therefore recharacterized the arrangement, invoking Section 86 of the Ordinance, an anti-avoidance provision addressing artificial transactions. Conversely, the Israeli taxpayer argued that this was a legitimate and commercially standard leveraged buyout structure and that using loans in cross-border M&A transactions is normal and not tax-driven.

The court decided in favor of the ITA, stating, among other things:

• Using leverage to buy a company is legitimate in principle. However, this was not the disputed point.
• The burden shifted to the Israeli taxpayer to show a genuine commercial rationale, and the judge found that it failed to meet that obligation, notably by not producing key contemporaneous documents and by the absence of relevant personnel who could speak to real-time considerations and intentions.
• The clear result was a tax reduction. Approximately $86 million of the target company's profits moved to a foreign resident without taxation in accordance with the local statutory two-tier tax model, and the taxpayer could not show a viable commercial purpose for the acquisition financing structure.

Inbound M&A and the associated planning of financing structures are a common feature of the Israeli tax landscape. The District Court decision touches on transaction planning in a manner that raises important considerations for local M&A transactions, with a focus on substance and contemporaneous documentation.

Read the decision (Hebrew). Read an unofficial translation prepared by the KPMG member firm in Israel.

For more information, contact a tax professional with KPMG’s International Tax and M&A practice in Israel:

Itay Falb | +(972) 3.684.8098 | itayfalb@kpmg.com

David Samson | +(972) 3.684.8970 | dsamson@kpmg.com

Michael Levi | +(972) 3.684.8157 | michaellevi@kpmg.com