Medinol in $150-225m dispute with Tax Authority

The Tax Authority demands capital gains tax on $750 million damages paid to Medinol by Boston Scientific.

Medical devices and equipment company Medinol Ltd., owned by chairman and CTO Dr. Kobi Richter and CEO Dr. Judith Richter, is one of Israel's most successful companies. It made headlines in the mid-2000s, following a well-publicized court case against Boston Scientific Inc. (NYSE: BSX).

Medinol claimed that Boston Scientific, which was its partner in the marketing of cardiac stents, has decided unilaterally to begin the production and sales of its own stents, in breach of the agreement between the parties.

Medinol sued Boston Scientific for $2-4 billion, and Boston Scientific counter-sued. The case ended in the autumn of 2005, after prolonged legal hearings before a New York court, with $750 million in compensation for Medinol, the highest amount ever awarded by a court to an Israeli company.

However, sources inform ''Globes'' that Medinol's struggle for the right to receive the compensation in full did not end with the settlement, but moved to a new front - against the Israel Tax Authority. The sources say that Medinol and the Tax Authority have been battling for a long time over the tax that the company should pay on the compensation. Whereas the Tax Authority argues that Medinol should pay capital gains tax at a rate of 20-30%, i.e. $150-225 million, Medinol claims that it is eligible for partial or full exemption from tax, on the grounds that the compensation it received should be considered as income from an authorized enterprise, and should therefore come under the definitions in the Law for the Encouragement of Capital Investment, making it tax exempt.

Information obtained by "Globes" indicates that the crux of the dispute between the Tax Authority and Medinol is whether, as the Tax Authority claims, that the $750 million in compensation should be considered as capital compensation paid to the company for damage to its business and cannot therefore be considered as company income from a tax-exempt authorized enterprise; or, as Medinol claims, the money should be considered as income that it obtained from an authorized enterprises and is therefore tax exempt under the Law for the Encouragement of Capital Investments.

Tax Authority is seizing a legal tax break

Medinol bases its claim on the compensation settlement signed with Boston Scientific. Medinol asserts that the agreement explicitly states that the $750 million compensation is for commercial profits that Medinol would have made from the production of stents and their sale to Boston Scientific had the agreement between the parties been kept. Medinol believes that it is also eligible for a tax exemption under the Law for the Encouragement of Capital Investments in this case because, over the years, it acted in good faith and fulfilled all its obligations and and all criteria for receiving the tax break under the law.

Medinol says that Boston Scientific knowingly acted in bad faith against it in breach of the agreement between the companies. Medinol claims that, after it defeated Boston Scientific and received the compensation it deserved, it discovered that the Tax Authority wanted to exploit the situation to seize the tax break accruing it from the state.

Medinol compensation for patent infringement

According to information obtained by "Globes", the Tax Authority believes that the compensation Medinol received from Boston Scientific cannot be classified under the Law for the Encouragement of Capital Investments. The Tax Authority argues that the tax exemptions for authorized enterprises are given to enterprises that operate in Israel, and that the purpose is to encourage investment and jobs in Israel, whereas the damages awarded to Medinol were unconnected to profits in Israel, but were for infringement of a patent, which Boston Scientific used overseas.

The Tax Authority said in response, "Due to the duty of confidentiality under the tax laws, we cannot comment on questions about the matter of a specific taxpayer."

"This is a tax process, which because it is pending before the court, is confidential. I therefore cannot comment on the details," said Adv. Pinhas Rubin, the chairman and senior partner of Gornitzky & Co., which represents Medinol. He added, however, "It can be assumed that a legal hearing on the matter will not even begin, since the parties are in constructive talks for reaching an agreement, which will render a hearing redundant and will satisfy the parties."

Published by Globes [online], Israel business news - www.globes-online.com - on June 11, 2013

© Copyright of Globes Publisher Itonut (1983) Ltd. 2013

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