The owner of the company died and left all the shares of the company to his heirs. The company owned the property. Some heirs wanted shares, while some wanted an amount equivalent to the value of the shares. The problem was that, by law, if additional assets were “introduced” into inheritance with the purpose of balancing assets, external funds, they would not benefit from the tax exemption granted for inheritance in order to pay the value of the shares to the heirs. The distribution of real estate assets of an inheritor is also considered a taxable “sale” unless it is the “first” distribution of real estate assets.
However, a new tax ruling released by Israeli tax authorities seeks to facilitate heirs in this situation, and states that even distributions of dividends from companies granted by inheritance constitute a distribution that benefits from tax exemptions from inheritance, with the aim of balancing the assets of the heirs. The tax authorities also set the sale of real estate to be tax-exempt for the purpose of distributing dividends and requested balances. This is unless “new” money is brought in from outside the property.
If awarded by the tax authorities, the father of the deceased family was the owner of the company, a real estate association, where assets were the sole stock of the subsidiary. The deceased father left his will for his wife, his three children and grandchildren, but due to a dispute between the heirs they agreed to a different distribution than that appears in the will. According to the heirs’ contract, the deceased’s two children will be left in the company’s shares in equivalent stock, while the third child and his child are entitled to cash arising from the dividends as they are directly heirs of the will.
Excess for dividend distribution
The company and its subsidiaries have surplus for dividend distribution. Additionally, cash balances and real estate assets are on sale to subsidiaries, and additional cash flows are expected to be generated. It was agreed that cash would be distributed to all heirs through dividend distributions.
As long as the amount of dividends declared by the company is higher than cash, the undiversified dividend balance is classified as the right of the company for the benefit of the heirs and is paid from cash arising from income from the company’s assets (acquired on the eve of the retirement party’s death). No external funds from companies or subsidiaries are taken to fund dividend payments.
In these circumstances, the company required that the full dividend be declared for the benefit of all heirs, and the full dividend was declared on the day of the declaration, and the taxes paid in accordance with the provisions of the Income Tax Ordinance. Dividends are derived from profits paid with full taxes in accordance with regulations.
The distribution of real estate assets of inheritors constitutes a taxable “sales” under the provisions of the law. However, Section 5(c)(4) of the Act provides exceptions to the rules. According to this, the initial distribution of the heir’s real estate assets is not considered a “sale” for legal purposes.
A heir concerned about the tax aspect of distribution and the possibility that the sale of real estate and distribution of dividends could be considered a taxable “selling” may apply to tax authorities that apply to tax authorities. Law.
Published by Globes, Israel Business News – En.globes.co.il – May 28, 2025.
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