Joulus Gazit & Co.


“Application of Section 3(b) of the Income Tax Ordinance on the Winding-up of a Company”

Abstract: The list addresses the question whether a partial debt repayment (haircut) in company winding-up proceedings could be considered “forgiving a debt” within the meaning of the term in section 3(b) of the Income Tax Ordinance. This section has a two-pronged purpose: One is to correct the accounting distortion caused in the books after the partial payment amount is requested as an expense, and the other is an anti-planning purpose. In order to fall within the ambit of the section, several cumulative conditions must be met. When winding up an insolvent company, the amount of the debt repayment is determined according to orders of priority and the law, and therefore is not voluntary and there is a basic similarity between the shareholders and its creditors. Therefore, the loss of the creditors’ debt should not be regarding as “forgiving a debt”.
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