Medingo – Ruling on the concept of post-acquisition business restructurings (Part II: analysis)

On 8 May 2022, the Tel Aviv-Yafo District Court (“the Court”) decided on a transfer pricing dispute regarding the concept of post-acquisition business restructurings. In 2010, the Roche Group acquired the shares of Medingo. Six months post the acquisition, the parties entered into several agreements, changing Medingo’s business model from that of a full-fledged entrepreneur to a low-risk manufacturing, sales and development site. Three years later, Medingo’s (pre-acquisition) IP was sold to Roche and its activities were ceased. The Court had to decide whether the (pre-acquisition) IP was transferred/sold to Roche at the time of acquisition or three years later, when Medingo’s activities were ceased. The Israeli tax authorities (“ITA”) attempted to disregard the agreement and to substitute this for a deemed sale of IP. Medingo/Roche ultimately won the case. In this note, we will share our insights/takeaways.

22 Nov. '22 Marnix Bekkenutte

For an overview of the case itself, reference is made to this blog.

The main issue in Medingo concerned the characterization of the transaction/agreements as a deemed transfer of functions, assets and risks (“FAR”). The case builds on two previous court cases in which the Israel Tax Authority (the “ITA”) scrutinized acquisitions of Israeli tech companies (Gteko and Broadcom), whereby following the acquisitions the FAR transferred. A deemed transfer of FAR, as used by the ITA, is or seems to be based on Chapter IX of the OECD Transfer Pricing Guidelines (“OECD TPGL”). This section lays down guidance on the transfer pricing consequences of business restructurings. To serve the purpose of this contribution we will refer to the 'transfer of a business as a going concern' (“TOGC”).

The positions of the ITA in Medingo does not stand on its own. The TOGC concept has been used by the ITA in at least two (somewhat) comparable cases, Gteko (2017) and Broadcom (2019). Gteko was acquired by Microsoft. Shortly thereafter its operations were transferred to Microsoft, whereby the Gteko employees moved to Microsoft’s subsidiary in Israel. The Court emphasized substance of form (w.r.t. the agreement/transactions). The post-acquisition transfer of workforce and IP was characterized as a TOGC. The ITA prevailed.

Marnix Bekkenutte

Marnix is an associate and is currently studying at Tilburg University for a Masters degree in Tax Law

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