The “Beneficial Owner” Concept in Israeli Tax Law: The Gottex Case

By Olga Timchenko, LLM

A Landmark Ruling on Tax Treaty Benefits and Holding Company Legitimacy

The definition and legal interpretation of the term “beneficial owner” plays a critical role in modern tax disputes involving cross-border distribution of income-dividends, interest, and royalties. This concept serves as a powerful tool to identify abusive arrangements involving conduit companies and artificial ownership chains designed for tax minimization.

On July 29, 2025, the Tel Aviv District Court delivered its ruling in Gottex Swimwear Brands Ltd. This decision is set to become an important precedent shaping future tax treatment of international holding structures and their beneficial owners.

Corporate Structure and the Subject of Dispute

The case involved an analysis of the tax consequences arising from a restructuring of the Gottex group, which featured a multi-tiered ownership structure typical of multinational corporations.

Prior to the restructuring, two individuals sat at the top of the pyramid as owners of Canada Inc. (Canada). That company, through the Dutch entity Swim Expert Alliance B.V. (SEA), held another Dutch company-F. Findings Realities B.V. (Findings). Findings, in turn, owned the Israeli company Gottex Swimwear Brands Ltd. (Swimwear), which was the group’s primary manufacturing and export asset. At the Findings and SEA level, there was virtually no operational activity: these entities functioned as holding vehicles through which ownership and financing were channeled.

Over several years, significant debt accumulated between shareholders and related companies vis-à-vis Swimwear. The total debt amounted to approximately NIS 309 million.

The key event-and the trigger for the dispute with the tax authority-was an intra-group sale in February 2013 of 100% of Swimwear’s shares. The shares were transferred from the Dutch Findings to the Israeli company Gottex Brands Holdings Ltd. (Holdings), which was fully owned by the same ultimate beneficiaries in equal parts. As a result, corporate control over Swimwear shifted to an Israeli entity.

The nominal transaction price was approximately NIS 491 million, but no actual cash changed hands between the parties. Part of the price-about NIS 182 million-was structured as a seller’s loan from Findings to Holdings, while the remaining debt of approximately NIS 309 million was assumed by Holdings, which took over the liability owed to Swimwear.

Following the transaction, Swimwear came under the Israeli Holdings, but the shareholder debts did not disappear. Shortly after the sale, in March and December 2013, Swimwear declared dividends payable to Holdings totaling approximately NIS 319 million. However, no actual cash payments were made. Instead, the parties executed a set-off: the declared dividends were applied to extinguish Holdings’ debt to Swimwear (approximately NIS 309 million), while the remaining NIS 10 million went toward partial repayment of Holdings’ debt to Findings under the loan component of the transaction.

This arrangement-the intra-group share sale followed by set-off of accumulated intercompany debts against dividends-became the central subject of the dispute. The tax authority viewed the scheme as an artificial structure designed to minimize tax and assessed additional tax on the dividends at 30%. The authority argued that the ultimate beneficial owners were the individuals at the top of the structure, who fully controlled the funds and decisions regarding asset distribution, while the Dutch company was merely a conduit. Therefore, the preferential 5% rate under the Double Tax Treaty between Israel and the Netherlands should not apply.

Arguments of the Parties

The Tax Authority’s Position

The tax authority focused on typical indicators of potential tax avoidance. From its perspective, the individual beneficiaries were the actual controllers of the financial flows, genuinely managing the funds and making the decisions, while Holdings in this scheme was nothing more than a conduit devoid of economic substance, created solely to implement a tax-reduction arrangement.

The authority also characterized the debt instruments as artificial “pseudo-loans” designed to facilitate dividend payments and denied Holdings the right to claim treaty benefits.

Gottex’s Defense

The Gottex legal team argued that the Dutch holding company, despite having no employees, possessed genuine legal capacity, could dispose of dividends at its discretion, and was a fully-fledged taxpayer under Dutch law.

They emphasized that the mere absence of employees does not render a company a conduit. This approach aligns with the international OECD doctrine, under which a beneficial owner is not necessarily the probable ultimate “actual” recipient, but rather a legal entity that genuinely owns and controls the assets.

Finally, Gottex’s attorneys pointed to the legitimate business rationale for the corporate restructuring-to simplify debt management and optimize the business model-and argued that the separation of debt instruments and partial write-off of obligations confirmed the financial logic of the transaction, not its fictitious nature.

The Court’s Decision

The Tel Aviv District Court held that the artificiality of a transaction is determined not by formal characteristics, but by the actual business purposes behind it.

In his reasoning, Judge Serussi analyzed the term “beneficial owner” and emphasized that preferential rates should apply to entities possessing the legal freedom to dispose of income. A holding company, even without staff, cannot automatically be deemed a conduit if it has no formal or informal obligation to pass the income on to others.

The court paid particular attention to analyzing the debt instruments and whether there was a genuine economic purpose for the debt restructuring, rather than mere financial manipulation for tax optimization.

While not denying a degree of artificiality in the transaction-particularly the set-off of debt as dividends-the court accepted Gottex’s arguments regarding the holding company’s status. It confirmed that limited or symbolic operational activity in a holding company does not, in itself, preclude beneficial owner status, provided the company’s role is connected to genuine independent financial activity, including servicing and managing financial flows.

The ruling explicitly stated that the tax authority failed to present sufficient arguments to prove the conduit nature of the holding company and that the taxpayer had abused the law.

The Burden of Proof

A crucial aspect of the decision was the court’s clear delineation of the burden of proof between the parties: it is the tax authority that must present convincing evidence that the taxpayer employed a tax scheme and abused the law-not the other way around.

International Context: The Danish Cases

When examining the Gottex case, it is impossible to ignore the development of judicial interpretation of the “beneficial owner” concept in the European Union, particularly as reflected in the so-called Danish cases. These decisions by the Court of Justice of the European Union (CJEU) not only influenced transnational tax regulation but also set the tone for subsequent judicial decisions across various jurisdictions, including Israel.

At the heart of both the Danish cases and the Gottex case lies the determination of the true beneficial owner and identification of instances where parties abuse the law through formal corporate structures. In both scenarios, courts emphasized the substance-over-form approach-analyzing not merely documentation, but actual rights to dispose of income. Both cases examined holding companies positioned as intermediary entities without their own staff or significant operational activity.

The CJEU and the Israeli court both distinguished between conduit and holding companies, defining a conduit company as one with formal ownership but lacking genuine rights to use the income. However, the positions differed in important details:

First, the CJEU formulated general criteria, strictly requiring intermediate companies to meet substance requirements (premises, personnel, management, expenses). The Israeli court took a more flexible approach to holdings lacking employees, allowing recognition of a company as beneficial owner with minimal operational activity-provided it has legal freedom to dispose of the income.

Second, while the CJEU focused on preventing abuse, the Israeli court sought to balance anti-abuse measures with respect for the right of businesses to independently determine their corporate structure, without creating excessive barriers to international investment.

Significance of the Gottex Precedent

The Gottex precedent is undoubtedly significant for Israel and may serve as an example for other jurisdictions in developing jurisprudence where the concepts of transaction artificiality and beneficial ownership are treated not as dogmas, but as subjects for comprehensive analysis grounded in the freedom of business to seek and determine optimal corporate structures in an era of globalization.

The Tel Aviv District Court’s decision marks an important stage in the evolution of Israeli tax law-a shift from formalism to comprehensive substance-over-form analysis. It demonstrates that the legal and economic independence of a holding company plays a key role in recognizing it as a beneficial owner.

The ruling sends a clear message: holding companies with minimal operational activity are not automatically suspect. What matters is whether the entity has genuine autonomy in disposing of income and whether it serves a legitimate business purpose beyond tax avoidance.

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This article discusses the decision of the Tel Aviv District Court dated July 29, 2025, in the matter of Gottex Swimwear Brands Ltd.