Tax Update | December 2019

Israeli Court Rules Against Israel Tax Authority

Change in Business Model Post Acquisition and Transfer Pricing

Do Not Trigger Tax Event

On December 11, 2019 the Israeli District Court ruled in favor of Broadcom and against the Israel Tax Authority (“ITA”)  in connection with the arguments asserted by ITA that as a result of change in a business model, post-acquisition, IP was transferred from Israel to Cayman (“Broadcom Case”). In the Broadcom Case, Broadcom Corp. a public company registered in the US and listed on the NASDAQ Stock Exchange acquired in a stock transaction shares of a US Company (Dune Networks Inc) which held an Israeli subsidiary company Broadcom Semiconductor Ltd. (“Broadcom Israel”). Post-acquisition, the Broadcom group of companies made changes in the intercompany agreements and transfer pricing according to which Broadcom Israel commenced providing Marketing Research and Development Services (“R&D Services”) on a cost plus basis to affiliates of Broadcom and came into License Agreement in which Broadcom Israel  provides license of its Intellectual Property in consideration for royalties payments from revenues based on a Transfer Pricing Study conducted by Broadcom (“License Agreement”). The ITA argued that as a result of such post acquisition new intercompany transactions, Broadcom Israel, changed its business model by becoming a service provider and came into conclusion that FAR (Functions Assets and Risks) located in Israel were transferred outside of the Statue of Israel. As a result, the ITA ruled that Broadcom Israel is liable for tax in Israel on the value of FAR.

The court disagreed with ITA’s position and arguments and ruled in favor of Broadcom Israel and came, among others, to the following conclusions.

(a)  Change in a Business Model does not indicate, by itself, that a company transferred its FAR.

(b) Change in a Business Model, is part of the business decisions of companies, including expectation that by increasing or decreasing risks or opportunities, revenues and/or gains shall be increased.

(c) The mere fact that a company is making a Change in Business Model does not mean that the ITA has the basis to reclassify the transactions and to rule that FAR were transferred from Israel. In the Broadcom Case the opposite happened Broadcom Israel revenues, gains, operation, employees were increased, as a result of the Change in Business Model.

(d) Using the FAR as a test for reclassification of transactions, should be examined by ITA very carefully and in a sensible manner. A series of transactions that have the outcome that an Israeli company ceased its operation can be a case that justifies reclassification.

(e) Moving into a service provider based on Cost Plus and license transactions does not solely constitute a transfer of FAR. The fact that as a result of the R&D Services new IP shall not be owned by Broadcom Israel, is not a basis for a claim that “old IP” was moved from Broadcom Israel. license transaction cannot be reclassified and automatically treated as a sale of IP if certain terms are existing and all substantial rights were not moved.

GKH Tax Department is involved in ITA assessments in which the ITA frequently made claims and arguments against multinational corporations that IP was moved from Israel, based on analyzing FAR post acquisition. Within such tax assessments the ITA reviews transfer pricing models post acquisition, change in intercompany agreements, relocation and move of key employees from Israel abroad, reduction in operation, decrease in revenue and other indications that can demonstrate in the view of the ITA moving of IP outside of the State of Israel. The ITA based its claims to support value of FAR and for calculating the amount of tax liability on the consideration paid in the acquisition transaction with certain adjustments and/or the Purchase Price Allocation (“PPA”). In that regard, the Court held in the Broadcom Case that a control premium should reduce the value even in case of 100% share acquisition and provided that it was taken into account by purchaser pre-acquisition.

The Court decision is very important in planning pre-acquisition and post-acquisition group’s activities and for taxpayer claims in the tax assessment procedures with ITA. We assume that the ITA shall appeal on the Broadcom Case to the Israeli Supreme Court for providing its opinion on the case.

For further information, you are welcome to contact Adv. Oren Biran, Partner and Head of the GKH Tax Department, at +972-3-607-4547 or via email: and/or other advocates from the GKH Tax Department

Gross, Kleinhendler, Hodak, Halevy, Greenberg, Shenhav & Co. (GKH), is one of the leading law firms in Israel, with over 170 attorneys. GKH specializes, both in Israel and abroad, in various fields of law including Tax, Mergers and Acquisitions, Capital Markets, Technology, Banking, Project Finance, Litigation, Antitrust, Energy and Infrastructure, Environmental Law, Intellectual Property and Labor Law.
This alert is prepared as an informational service to clients and colleagues of Gross, Kleinhendler, Hodak, Halevy, Greenberg, Shenhav & Co. (GKH) and the information presented is not intended to provide legal opinions or advice. Readers should seek professional legal advice regarding the matters about which they are particularly concerned.





Oren Biran

Phone +972-3-6074547

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