Deduction of Expenses for an IPO That Did Not Take Place
During the last year, many Israeli companies decided to cancel the IPO process they commenced with the objective of raising capital from the public. The main reason for deciding not to complete the IPO process stemmed from sharp drops in the markets, which impacted the value of many companies. Within the IPO process, the companies incurred many expenses, such as: payment to underwriters, attorneys, and accountants, in the scope of millions of NIS.
It is accepted to view IPO expenses as capital expenses which are not recognized as expenses for tax purposes, subject to two exceptions: 1. Industrial companies (including hi-tech companies) are eligible to deduct the IPO costs for tax purposes in three equal annual rates; 2. Within an emergency order for the years 2018 – 2020, which permitted all companies who offered shares for trade on the stock exchange in Israel (even if they were not industrial) to deduct IPO costs in full in the year in which the IPO was executed.
The reason why the Ordinance’s provisions view IPO expenses as capital expenses is because the IPO was intended to create a new source of capital which would yield an economic advantage in the future, and therefore the expenses cannot be attributed to a particular tax year. However, the question arises whether the provisions of the Ordinance enable deduction of IPO expenses for tax purposes, after it has been decided not to execute the IPO, since in such cases no change has occurred in the structure of the company’s capital.
The decisions of courts that discussed capital expenses indicate that these expenses would be recognized for deduction in the year in which they ceased to provide the taxpayer with a continuous advantage.
Thus, for example, the Supreme Court’s decision in the Pi Glilot case concluded that expenses for various surveys the company executed for the purpose of a transaction to purchase a capital asset, which was not executed, would be recognized for deduction in the current year, since the expense does not yet entail any component of a future advantage. And with respect to the matter under discussion, although the IPO expenses were intended to create a capital source that would yield an economic advantage for the company beyond the tax year in which they were incurred, at the point in time when a decision was made not to execute the IPO, the expense no longer entails any component of a continuous advantage for the company.
Another example can be found in the Zinometal case, which stated that IPO expenses can be recognized on the date on which the capital structure created due to the IPO ceases to exist, whether due to dissolution of the company or due to another change that nullifies the aforementioned structure. As stated, in cases in which the IPO was not executed, the IPO expenses did not lead in the end to a change in the company’s capital structure. Therefore, if it is possible to recognize for deduction IPO expenses that led to a change in the company’s capital structure on the date on which the capital structure returned to its previous state (for example, after dissolution of the company or after the company purchases back its own shares), clearly IPO expenses that did not lead in the end to any change in the company’s capital structure could also be recognized for deduction (for example, after reaching a decision not to execute the IPO).
An interpretation according to which the company is eligible to deduct the IPO costs in situations where the IPO did not occur, is in line with the Ordinance’s intent to tax the taxpayer’s real income, and also complies with the accounting rules, according to which expenses for an IPO that was not executed are recorded as expenses in the income statement for the current year.
For additional information, contact Adv. (CPA) Shahar Strauss or Adv. Shiran Polishuk from our firm
Join Newsletter