Israel: Court decision on business restructuring and deemed transfer of business functions, assets and risks

A decision concerning claims of business restructuring and a deemed transfer of business functions, assets, and risks

Concerning claims of business restructuring and a deemed transfer of business FAR

The Tel Aviv district court today held for the taxpayer in a decision concerning claims of business restructuring and a deemed transfer of business functions, assets, and risks (FAR).

The case is: Medingo Ltd v. Afula Assessing Officer. Read the decision (Hebrew) [PDF 9.5 MB]

KPMG observation

The decision provides what tax professionals view as helpful precedent in an area of frequent controversy between taxpayers and the Israel tax authority.


In 2010, the taxpayer was acquired by a member of a multinational pharmaceutical group for approximately U.S. $160 million.

In the following months, the taxpayer entered into several agreements with various related group entities, whereby the taxpayer provided a license to its current intellectual property (IP), and going forward, would provide ongoing research and development (R&D) and other services on a cost-plus basis.

During 2012, the taxpayer declared its intention to “wind down” local activities no later than December 2013. In November 2013, the taxpayer sold its current IP to group entities for a consideration of CHF 42.9 million.

The Israel tax authority viewed the original licensing and cost-plus service arrangement as an effective transfer of the local FAR associated with the standalone business activity of the taxpayer. Thus, the tax authority rejected the IP sale in 2013, and issued an assessment for a deemed capital gain of approximately NIS 480 million (approximately U.S. $120 million), derived from the original acquisition price. The issues ultimately ended up before the district court.

The court decision released today focuses on a number of factors—including the content of the intercompany agreements, the continued local activity/management, and patent registrations—and the court concluded that there was insufficient basis to support a claim of a deemed transfer per se. The court’s decision quotes broadly from a 2019 district court decision (Broadcom Semiconductor Ltd. v. Kfar Saba Assessment Officer) and rejects the tax authority’s contention that the changes in respective risks and functionality themselves could constitute a FAR transfer.

KPMG observation

The claims and issues in this decision have been broadly challenged by the tax authority in other cases with regard to local controversy and IP planning. While a district court decision does not create binding law, today’s decision—together with that in the Broadcom case—provides what tax professionals view as important taxpayer-friendly precedent. It remains to be seen whether the tax authority will file an appeal to the High Court and, thereby, risk a binding decision.

For more information, contact a tax professional with KPMG’s Global Transfer Pricing Services practice in Israel:

David Samson | +(972) 3.684.8970 |

Itay Falb | +(972) 3.684.8000 |


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