Israel: Value of IP need not include “tax gross-up,” but must include “holdbacks” (District Court decision)

The Tel Aviv District Court on October 28, 2025, held that the sale value of intangible property (IP) does not need to be “grossed up” for the expected future tax liability on the asset transfer, but “holdback” payments to founders must be included in the company and IP value.

The case is: Hexadite Ltd. v. Tel Aviv 3 Tax Assessor. Read the decision (Hebrew). Or read an unofficial English translation.

Summary

The taxpayer, an Israeli technology company, was acquired in 2017 by a U.S. company for US $75 million. Part of the consideration for the founders’ shares was withheld, conditional on their continued employment for three years. After the acquisition, the taxpayer transferred all its activities and assets to its U.S. acquirer and reported the sale value as US $65.4 million (excluding the holdbacks).

The Israel tax authority (ITA) challenged the valuation analysis and issued an assessment based on an adjusted IP value of US $95.9M. The ITA argued that the holdback must be included in the company and IP value and that the sale value must be grossed up to include the future tax liability on the asset transfer.

With regards to the gross-up, the court ruled in favor of the taxpayer, stating (among other points):

• The sale value need not be grossed up for future tax liability.
• The correct valuation method is the comparable uncontrolled price (CUP) method, which relies on the actual price paid in a transaction between unrelated parties.
• The OECD guidelines and Israeli tax circulars do not require grossing up for future tax in such cases.
• The ITA’s attempt to change policy retroactively and without transparency was improper.
• The price paid in the share transaction already reflected all relevant considerations, including tax, and no further gross-up was justified.

With regards to the holdbacks, the court ruled in favor of ITA, stating (among other points):

• The holdback payments to founders (conditional on continued employment) must be included in the sale value.
• The holdbacks were part of the consideration for the shares, not a separate payment for employment.
• Excluding the holdbacks would artificially reduce the value of the assets transferred.

The court also upheld a secondary adjustment applying deemed intercompany interest on the additional revenue deemed to have been received by the local entity but accepted the taxpayer’s argument that the imposed interest must reflect actual arm’s length terms, rather than the higher rate imposed by ITA.

The court criticized the ITA for lack of transparency and for attempting to change policy without proper notice and accordingly imposed the taxpayer’s legal expenses on the ITA.

It remains to be seen whether the ITA will appeal the decision to the High Court.

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

David Samson | dsamson@kpmg.com

Itay Falb |  itayfalb@kpmg.com