The District Court of Lod ("District Court") accepted the position of the Israeli Tax Authority ("ITA") and reassessed the value of a transaction to sell all of the intellectual property of a company that was entered into after the sale of all of the company's shares.
In 2006 Microsoft purchased all of Gteko's shares for approximately USD 90 million. Subsequently, all of Gteko's employees were hired by Microsoft Israel. Six months later, an agreement was executed between Microsoft and Gteko by which Gteko sold to Microsoft all of its intellectual property for USD 26.6 million, based on a fair value analysis. The ITA claimed that, in essence, the second transaction constituted the sale of Gteko's entire activity and not only the sale of its intellectual property. The ITA thus valued the transaction at USD 90 million, the purchase price that had been fixed for of all of Gteko's shares.
The District Court held that in the event of a dispute between the parties regarding a classification and scope of a transaction, the burden of proof is on the taxpayer
The District Court also held that the transaction should be taxed based on the essence of the transaction and not based on the form of the transaction presented by the parties; behind what was presented as a sale of intellectual property was effectively the sale of all of Gteko's operations.
The District Court did not rule out the possibility that it would be possible to justify a difference in value between a transaction to sell the shares of a company and a transaction for the sale of an activity. For example, in an acquisition of a company where a control premium is paid. On the other hand, synergy (a unique combination of the acquired asset with the purchaser's activity) would not justify a gap, because the synergy would exist both on the level of the shares transaction and on the level of the intellectual property transaction.
The District Court also ruled that the ability of a company to transfer employees as a single unit to another company may be considered an asset and that such transfer may have great economic value that can be taxed. However, the District Court recognized that there will be purchase price components in a share purchase agreement that should be deducted from the transaction value of a sale of intellectual property, such as payments paid in the share sale transaction as a retention bonus to employees.
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