The owner of a company died and left all the company’s shares to his heirs. The company owned real estate. Some of the heirs wanted shares and some wanted a sum of money equivalent to the value of the shares. The problem was that, by law, if additional assets are “introduced” into the inheritance for the purpose of balancing assets, money from outside, for example, to pay the heirs the value of their shares, they do not benefit from the tax exemption granted for inheritances. The distribution of real estate assets between heirs is also considered a taxable “sale”, unless it is a “first” distribution of the estate’s assets.
However, in a new tax ruling published by the Israel Tax Authority, it is trying to make matters it easier for heirs who find themselves in this situation, and states that even the distribution of a dividend from a company that was granted by inheritance, for the purpose of balancing assets between the heirs, constitutes a distribution that benefits from tax exemption for inheritances. The Tax Authority also set that the sale of the real estate for the purpose of distributing the dividend and the requested balance will also be exempt from tax. This is so long as no “new” money was brought in from outside the estate.
In the case that the Tax Authority ruled on, the father of the family who died was the owner of a company whose only asset was the shares of a subsidiary, which is a real estate association. The deceased father left behind a will for his wife, his three children and his grandchildren, but due to a dispute between the heirs, they agreed on a different distribution than that appearing in the will. According to the agreements between the heirs, two of the deceased’s children will be left with the company’s shares in equal shares, while the third child and his children, who are direct heirs in the will, will be entitled to cash, originating from a dividend, which will be distributed from the subsidiary to the company, and from there to all the heirs, as part of the distribution of the estate.
Surpluses for dividend distribution
The company and its subsidiary have surpluses for dividend distribution. In addition, the subsidiary has a cash balance and a real estate asset that is in the process of being sold, and is expected to generate additional cash flow. It was agreed that the cash will be distributed to all heirs through a dividend distribution.
To the extent that the amount of the dividend declared by the company is higher than the cash, the undistributed dividend balance will be classified as a right in the company for the benefit of the heirs, and will be paid from cash that will stem from income from the company’s assets (acquired on the eve of the deceased’s death). In order to finance the payment of the dividend, no external financing will be taken, including by the company or by the subsidiary.
In these circumstances, the company requested to declare the full dividend for the benefit of all heirs, with the full dividend being declared on the date of declaration and the tax paid in accordance with the provisions of the Income Tax Ordinance. The dividend is derived from profits for which the full tax was paid, in accordance with the provisions.
The distribution of real estate assets between heirs constitutes a taxable “sale” under the provisions of the law. However, Section 5(c)(4) of the Law provides an exception to the rule, according to which a first distribution of estate assets between heirs is not considered a “sale” for the purposes of the Law, provided that no consideration was given in money, or in the equivalent of money, that is not an asset included in the estate assets.
The heirs, who were concerned about the tax aspects of the distribution, and the possibility that the sale of the real estate and the distribution of the dividend would be considered a taxable “sale” and not a first distribution of the estate assets, applied to the Tax Authority with a request to determine that the dividend to be distributed from the company to the heirs is an asset included in the estate assets, within the meaning of the term in Section 5(c)(4) of the Law.
Published by Globes, Israel business news – en.globes.co.il – on May 28, 2025.
© Copyright of Globes Publisher Itonut (1983) Ltd., 2025.
