Recent years have seen a significant increase in publicly raised capital on the stock market by partnerships engaged in oil and gas exploration, which presents challenges due to existing tax legislation in Israel. In general, partnerships are not subject to income tax, as they are pass-through entities whereby each partner is taxed on its share of income from the partnership. However, the legislature granted oil and gas partnerships the discretion to elect whether to be taxed as a partnership or a company.
The main tax advantage for oil and gas partnerships to elect to be taxed as a partnership is that a partnership is transparent for tax purposes and its income and expenses are taxable at the partner level. Accordingly, in the first years of the oil and gas partnership’s activity, the partnership’s large drilling and search expenses and use the losses incurred during those years is attributable pro-rata to its partners based on their holding percentage in the partnership. However, alongside the apparent tax advantage, there are also several disadvantages.
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This article was published by The International Law Office (ILO), a series of legal newsletters which provide expert legal commentary in the form of concise, regular news updates.