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.
