HPE to pay NIS 1.6b tax on Mercury acquisition
Ela Levi-Weinrib
The international arbitrator ruled in favor of the Israel Tax Authority in the 2006 deal.
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International computer giant HPE (formerly Hewlett-Packard) will pay NIS 1.6 billion in tax on its 2006 acquisition of the intellectual property of Israel company Mercury Interactive, in addition to the NIS 1 billion already paid to the Israel Tax Authority for the deal.

The ruling was given in an international arbitration between the Tax Authority and HPE. In the arbitration framework, the parties agreed on a compromise in which NIS 4 billion in the Tax Authority's assessments for 2009 and two larger assessments of NIS 9 billion and NIS 7.2 billion for 2007 and 2008, respectively, are to be canceled.

HPE acquired Mercury Interactive , which supplies business technology optimization (BTO) systems, for $4.5 billion in cash in November 2006. The deal was regarded at the time as HPE's largest software acquisition up until that time.

The acquisition was in two stages. In the first stage, the shares in Mercury Interactive were acquired, and the Israeli shareholders paid the tax. In 2009, however, ostensibly with no connection to the main deal, Mercury Interactive's intellectual property was transferred to the international company at a substantially lower price of $963 million.

Following the transfer of the intellectual property, the Tax Authority alleged that only one deal was involved - the sales of the intellectual property, which was taxable at the full value of $4.5 billion, not the $963 million paid later for the transfer of the intellectual property. The Tax Authority's assessment was therefore based on the larger sum. HPE objected, and the parties agreed on international arbitration, which ended with a NIS 1.6 billion additional payment by HPE, according to an opinion by a US expert, who set the balance of the tax at this amount. The parties thereby settled the dispute between them.

HPE was not the only company in recent years to be assessed according to the value of its shares, rather than the intellectual property it declared. As reported by "Globes" in October 2013, following the boom in the high-tech sector, the Tax Authority targeted Israel high-tech companies that made exits. There were numerous disputes about the amount of tax to be paid on these deals, following what the Tax Authority referred to as a "change in business model."

The source of the dispute is the method used by international companies to acquire Israeli technology companies. The first step is the purchase of an Israeli startup's shares, sometimes for hundreds of millions of dollars. Later, ostensibly with no connection to the first deal, the companies making the acquisition transfer the Israeli companies' intellectual property to companies related to them at a substantially lower price - sometimes for only a few million dollars or tens of millions of dollars. What really interests the foreign companies making the acquisition is the technology (intellectual property), not the Israeli companies' personnel. Tax considerations, however, lead all those involved in the deal to portray it as a sale of shares, not a sale of intellectual property.

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In the Tax Authority's opinion, Israeli exits taking place in two stages constitute one sale, and should be taxed accordingly, rather than according to the lower amount in the second deal. In view of this position, the Tax Authority issued much higher tax assessments than the initial amounts, leading to disputes, some of which have been heard in court. A Tax Authority source told "Globes" that there were currently at least five more cases involving this point being heard in the courts.

One of these cases was recently concluded, with the Central District Court ruling that Microsoft would pay over NIS 100 million in tax on the transfer of the activity of its Jitco subsidiary from Microsoft US to Microsoft Israel. Tax Judge Dr. Samuel Borenstein upheld the position of the Kfar Saba tax assessment office against the appeal filed by Jitco against the assessment, under which it must pay tax on the transfer of activity between related companies.

Advocate Yaniv Shekel from the Shekel & Co. law firm represented HPE.

Published by Globes [online], Israel Business News - www.globes-online.com - on July 20, 2017

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