The Israeli Supreme Court has just issued a short judgment with enormous tax ramifications for multinational tech groups with R&D in Israel (Broadcom Broadband Axis v. Gush Dan Assessing Officer, 2454/19 of August 28, 2019).The founders of Israeli tech companies dream of their shares being acquired at a big gain by a multinational on which they pay tax. But once it happens, multinationals naturally enough want to integrate the intellectual property (IP) in their worldwide activities.Unfortunately, that triggers a second charge to Israeli capital gains tax if the acquirer transfers the IP of the newly acquired Israeli company (rather than shares) to another company in the acquiring group.Israel lacks a section preventing double taxation of the shares and assets of a company (unlike Section 338 in the USA). Worse still, the Israeli Supreme Court ruled the IP integration in this case was under-reported.The facts of this caseIn 2012, Broadcom Corporation of the US acquired all the shares of Broadlight Inc, another US corporation which had an Israeli subsidiary, for around $200 million. Around three months later, the Israeli company sold its IP for only $59.5m. Two companies in the Broadcom group then signed agreements with the Israeli company for it to supply R&D, marketing and support services for a fee equal to costs incurred plus a profit mark-up (“cost-plus basis”).The ITA felt that the $59.5m. figure was insufficient and assessed a shekel figure equivalent to $168.5m. based on FAR (Functions, Assets and Risks) transferred. These are normal transfer-pricing criteria for valuing transactions between related parties on an arm’s length (market value) basis.The taxpayer went to court and claimed that the onus of proof was on the ITA to justify the $168.5m., having regard to the rules in the Income Tax Ordinance, in particular Section 85A (transfer pricing) and Section 86 (artificial or fictitious transactions).The taxpayer claimed this was done for reasons under California law, but a Californian legal opinion to this effect did not reach the court in time and so it wasn’t relevant.The Israeli District Court and the Supreme Court issued a stunning decision in favor of the ITA.What the Supreme Court saidThe question in this case is what actually happened in Israeli tax terms. Was a different classification of the transaction needed? This would be a matter of fact, e.g., under general or contract law. For example, a gift transaction may be defined as a sale for tax purposes. The ITA could then ignore a transaction wrongly reported. This was not the case here.Was a re-classification needed of an artificial transaction lacking fundamental commercial rationale for carrying it out the way it was done? If the ITA can prove this, the ITA can re-classify the transaction.In this case, the Supreme Court looked through the muddle on both sides and found that factually only the sale of the IP asset was reported, but the remaining FAR did not stay “under one roof” and the taxpayer should have reported their sale, too. In other words, an entire going concern was effectively sold having regard to FAR, not just IP, and it was the taxpayer’s responsibility to report the FAR sale.To sum upDon’t try and slide your onshore operation offshore. The ITA will tax you in full on sales of FAR to far-off locations. And always line up all your ducks in a row. Don’t go into the Israeli Supreme Court without a legal opinion if your case depends on it.As always, consult experienced tax advisers in each country at an early stage in specific cases. The writer is a certified public accountant and tax specialist at Harris Horoviz Consulting & Tax Ltd. firstname.lastname@example.org.