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Can an Israeli company split off part of its business into a separate company?

Yes. A split, known in Hebrew as a pitzul, is a recognized reorganization, and the tax relief that makes it viable comes from Sections 105 to 105H of the Income Tax Ordinance. Done correctly, moving a division into a new or existing company happens without triggering capital gains tax, provided the Israel Tax Authority approves the structure in advance, each resulting company continues to run a genuine business, and shareholders keep proportionate holdings across the split entities for a restriction period of roughly two years. The corporate steps run alongside: board and shareholder resolutions, share issuance, and filings with the Companies Registrar.

The Companies Law 5759-1999 sets out a statutory merger procedure but no equivalent statutory split, so a split is assembled from ordinary corporate tools. The company resolves to transfer a defined business, with its assets, contracts and employees, to a subsidiary or sister company in exchange for shares, and those shares are then distributed to the existing shareholders. Where that distribution fails the Companies Law profit test, court approval is needed in the same way as any other reduction of capital. Creditor notice, employee continuity under the Severance Pay Law 5723-1963, and consents under material contracts all have to be handled before completion.

Foreign shareholders should design the split around the tax approval rather than the other way around. The Israel Tax Authority reviews the commercial rationale closely, and a split arranged mainly to prepare one arm for sale attracts scrutiny, because the restriction period limits both share disposals and asset transfers afterwards. Splits that include Israeli real estate need parallel relief from land appreciation and purchase tax, which adds months. For a foreign group already running an Israeli holding company structure, incorporating the new entity first and transferring the business under Section 104 of the Ordinance is often cleaner than attempting a full split.

⚖ In Practice
  • Governing law: Sections 105 to 105H, Income Tax Ordinance [New Version] for splits, and Section 104 for asset transfers; corporate steps under the Companies Law 5759-1999
  • Competent authority: Israel Tax Authority (Rashut HaMisim) for the advance ruling; Companies Registrar (Rasham HaChavarot) for the corporate filings
  • Advance ruling: required before completion in most cases; the Tax Authority commonly responds within three to six months
  • Restriction period: approximately two years after the split, during which shareholders may not materially reduce their holdings and the companies may not dispose of the transferred assets
  • Cost: ruling application and professional fees commonly total NIS 40,000 to NIS 150,000 for a mid-sized split (2026)

From the full guide: Holding Company in Israel: A Complete Guide for Foreign Investors

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Get a Free Consultation with Adv. Eli ShimonyPrepared under the direction of Adv. Eli Shimony, Eli Shimony Law Office · Editorial policy

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