Medingo Ltd., incorporated in Israel, (developer of a proprietary insulin pump) and its foreign holding company, Roche pharmaceutical group, established intercompany agreements for Medingo to provide R&D, manufacturing, and related services, all on a contract basis to Roche. They also established a license agreement between themselves with respect to Medingo’s legacy IP – wich was eventually sold to Roche.
The Israeli tax authorities characterized the intercompany arrangements as a transfer of functions, assets, and risks (FAR), retroactively to 2010 when Roche acquired Medingo, and applying the initial acquisition price as reference to determine the value of said FAR as roughly $138.5 million, subject to capital gains tax. The court stated that only in exceptional circumstances, tax authorities are required to intervene in the nature of the transaction agreed by the parties namely, where such transaction is clearly unreasonable or where it is impractical to determine its arm’s length price.
The court found the intercompany agreements to be acceptable and held that the post-acquisition agreements were not necessarily influenced by the fact that the parties were now related. The court distinguished between legacy IP and new IP and held that Roche’s license to use the legacy IP was for a fixed period and Roche acquired said IP at the end of that period. Further, the court held that businesses can change their business models, such as Medingo’s reduction in risks from IP owner to a licensor and contract service provider, and that does not imply a sale of business activity.