The Israel Tax Authority (ITA) recently approved a strategic reorganization within a corporate group, allowing for the transfer of rights in a registered partnership from a subsidiary to its parent company without triggering immediate tax liability. This ruling, based on Section 104C of the Income Tax Ordinance, provides a powerful roadmap for executives looking to simplify holdings, unify synergistic operations, and transition to a pass-through taxation model under the protective umbrella of Part E2.
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The Bottom Line:
A parent company that has acquired a subsidiary holding partnership interests can now "pull up" those interests to the parent level without paying tax at the time of transfer. This maneuver allows for the operational and administrative consolidation of synergistic activities into a single entity while maintaining original tax basis values and deferring tax liability until a future realization event.
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Executive Summary: Key Findings

• Tax Exemption under Section 104C: The transfer of the partnership interests was recognized as a tax-exempt restructuring, provided the group complies with Part E2 requirements.
• Direct Tax Transparency: Following the transfer, the partnership’s results are reflected directly at the parent company level (per Section 63), streamlining cash flow and tax management.
• Basis Continuity: The "original cost" of the partnership rights is determined using a relative value mechanism linked to the parent's investment in the subsidiary, preventing artificial tax basis inflation.
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Background: Post-Acquisition Structural Optimization

In this case, Company A (the Acquirer) purchased 100% of the shares of Company B (the Transferor) in early 2025. Company B held 99.99% of the rights in a registered partnership whose business was synergistic with Company A’s core operations.

Management sought to move the partnership rights from Company B directly to Company A. The goal was to enable unified management and operation under one legal roof without the transfer being classified as a "sale event" subject to Capital Gains Tax. The legal challenge involved applying Section 104C—which typically governs asset transfers between parents and subsidiaries—to a complex asset like partnership interests.
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The Legal Issue: Can Partnership Rights be Transferred Tax-Free?

The central question was whether transferring partnership rights qualifies under Section 104C, which allows for the tax-free transfer of assets from a subsidiary to its 100% parent. The challenge was establishing a new "original cost" (basis) for the rights in the hands of the parent company in a way that preserves tax continuity and prevents the erosion of the future tax base.
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The ITA’s Decision and Legal Analysis

The ITA granted the request, ruling that the transfer would be tax-neutral subject to several critical conditions:

1. Relative Value Mechanism: The original cost of the partnership rights in the hands of the parent (Company A) is derived from the parent's original cost of the subsidiary's shares (Company B), multiplied by the ratio of the partnership's market value to the subsidiary's total market value.
2. Elimination of Old Basis: The historical original cost of the rights as recorded in Company B’s books is "deleted" for tax purposes to prevent double-dipping on tax benefits.
3. Loss Offsetting Restrictions: The parent company is subject to the limitations of Section 103H, preventing the improper use of the partnership’s past losses against the parent’s profits, and vice versa.
4. The Pro-Rata Rule: Any future sale of the partnership interests will be treated as a proportional sale of both original and allocated rights, ensuring "true tax" collection upon exit.
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Practical Takeaways for Executives

For corporate groups engaged in M&A, this ruling provides a strategic blueprint for "Day 2" integration:

• Post-Merger Integration (PMI): If you have acquired a company that holds interests in partnerships, you can move those holdings up to the parent level without a tax "penalty," thereby simplifying the organizational structure.
• Synergy Management: This move allows for the consolidation of headquarters and financial management for similar activities, making the partnership a fully transparent entity for the parent’s tax purposes.
• The "Required Period" Caution: The tax exemption is contingent on continuing the activity and not selling the assets for at least two years from the date of the restructuring. Long-term strategic planning is essential to avoid violating this condition.
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FAQ

Q: Can any asset be transferred from a subsidiary to a parent tax-free in Israel?
A: Section 104C allows this under strict conditions, including 100% ownership of the subsidiary and obtaining a formal Tax Ruling (Ruling) for complex assets like partnership interests.

Q: What happens to the partnership’s accumulated losses after the transfer?
A: The losses transfer along with the rights, but offsetting them against the parent company’s profits will be subject to the annual limitations set forth in Section 103H.

Q: Does this maneuver require a formal valuation?
A: Yes. To determine the "Relative Value" and the new original cost of the rights, an expert valuation accepted by the Israel Tax Authority must be presented.

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