Medinol, Tax Authority dispute $750m settlement

Medinol, Judith and Kobi Richter
Medinol, Judith and Kobi Richter

The contested issue is the tax rate Medinol is to pay for the settlement it received from Boston Scientific.

The civil dispute between the Israel Tax Authority and private medical device company Medinol, owned by Dr. Judith Richter and Dr. Kobi Richter, is coming before a judge. The contested issue is the tax rate Medinol is to pay for the $750 million settlement it received from the US company Boston Scientific.

Sources inform “Globes” that the evidentiary stage began today in the civil trial, before Tel Aviv District Court Judge Magen Altuvia, who specializes in matters of taxation. By law, legal conflicts on tax matters are handled behind closed doors, therefore, it will not be possible to report on the details of the evidentiary hearing in this fascinating case. Unless the court forbids doing so, it will be possible to report on the decision, when a verdict is reached.

Already eighteen months ago, in January 2014, “Globes” reported that the talks between Medinol and the Tax Authority to reach an agreement regarding the tax rate to be applied to the settlement the company received had failed, and the matter was expected to come before Judge Altuvia for a decision.

Since that time, great efforts have been made by both parties to reach an agreement, and compromise proposals were even passed between them. However, the proposals did not satisfy the parties. The Tax Authority was determined to charge Medinol capital gains tax at a rate between 20% and 30% of the settlement it received - in other words, between $150 million and $225 million. Medinol, on the other hand, claimed that it is entitled to receive a full or partial tax exemption on the settlement. Medinol claims that as a company with “Approved Enterprise” status, the settlement payment that the company received should be considered income from an approved enterprise, and should therefore fall under the Law for the Encouragement of Capital Investments and be exempt from tax.

Breach of Contract Settlement

The affair began in the mid-2000s, when Medinol, one of the most successful Israeli companies in history, dominated headlines with its widely-reported case against Boston Scientific. Medinol claimed that Boston Scientific, which was the company’s marketing partner for cardiac stents, began manufacturing and marketing its own stents, in violation of an agreement between the parties.

Medinol sued Boston Scientific for $2-4 billion, and Boston Scientific filed a counter-suit. The case ended in 2005, after an exhausting litigation proceeding in New York, with a $750 million settlement for Medinol - the highest amount ever ordered by a court to be paid to an Israeli company. However, Medinol’s battle over the right to receive the full amount of the settlement did not end there, but instead continued on a different front - against the Israel Tax Authority. The Israel Tax Authority and Medinol have been arguing for three years about the tax rate the company is to pay on the settlement.

Taxable income, or capital gains?

The heart of the dispute between Medinol and the Israel Tax Authority on the matter surrounds the question of whether, as the Tax Authority claims, the $750 million that the company received should be considered a cash settlement paid to the company for damage to its business, and not tax exempt company income from an approved enterprise. Medinol claims the income should be considered income that the company received from an approved enterprise, and is therefore eligible for a tax exemption under the Law for the Encouragement of Capital Investments. Medinol based its claim on its settlement agreement with Boston Scientific, in which Medinol claims that it is clearly stated that the $750 million settlement is for commercial profit that Medinol would have generated from the manufacture of medical stents and their sale to Boston Scientific, had the agreements between the parties been upheld.

Medinol believes it is entitled to 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 the obligations and criteria that make it possible to receive benefits by law. Medinol further claims that Boston Scientific acted in bad faith, and knowingly violated the agreements between the companies. Medinol claims that after it won the case against Boston Scientific and received the settlement it deserved, it became clear that the Israel Tax Authority wanted to take advantage of the situation and take from Medinol the benefits to which it was entitled under the Law for the Encouragement of Capital Investments.

The Israel Tax Authority, on the other hand, believes that the settlement that Medinol received from Boston Scientific does not fall under the Law for the Encouragement of Capital Investments. According to the state, the tax exemptions for approved enterprises are given to enterprises that operate in Israel, and that the point of the law is to encourage investment and employment in Israel. However, in the case of Medinol, the settlement was paid with no connection to the company’s profits in Israel, rather for Boston Scientific’s patent violation abroad.

Why behind closed doors?

Tax assessment appeals, like the assessments themselves, are private matters - this is a fundamental assumption of Israeli law. This is the main reason that the income tax ordinance states that the right to appeal is the decision of the district court assessment clerk, and the appeal is to be heard “behind closed doors, unless the court has ordered otherwise on the request of the appealing party.”

D. Potchebutzky Law Offices partner Adv. David Goldman explains, “During the appeal proceedings, it’s possible that intimate, private details pertaining to the appealing party may be revealed, such as details of the relationship with their husband or wife, or matters pertaining to the family. Other personal matters that the law seeks to protect are trade secrets, such as business deals, clients, the company’s financial situation, and the like.

“Of course, the public’s right to information must be weighed against the right to privacy,” adds Goldman, “and the balance is expressed in various ways - for example, in the fact that the rulings are released at the end of the process, but the judges make an effort not to include personal or commercial details in the verdict itself unnecessarily. Another example is publishing verdicts with the appealing party listed only as ‘anonymous.” We tax lawyers, of course, represent our clients’ interests, who naturally wish to minimize the exposure as much as possible.”

Kobi and Judith Richter

Medinol owners Jacob (Kobi) and Judith Richter are among Israel’s wealthiest businesspeople. Their wealth is estimated in the hundreds of millions of dollars, at least.

Kobi Richter grew up in Kibbutz Ramat Yochanan. He served in the Israel Air Force, where he had a very impressive record as a combat pilot. During his military service, he met his wife Judith, who was an officer at Ramat David base. Kobi worked as a post-doctoral and research fellow at the Artificial Intelligence Laboratory and Brain Research Department of the Massachusetts Institute of Technology (MIT), and served as head of research and development for the Israeli Air Force.

Prior to founding Medinol in 1993, Dr. Kobi Richter co-founded the Nasdaq listed microelectronic product company Orbotech, and Dr. Judith Richter founded and served as CEO of web-based cardiac imaging and information management company Medcon Ltd., until its acquisition in 2005.

Judith Richter is CEO of Medinol, and Kobi Richer is Chairman and CTO.

Published by Globes [online], Israel business news - www.globes-online.com - on April 15, 2015

© Copyright of Globes Publisher Itonut (1983) Ltd. 2015

Medinol, Judith and Kobi Richter
Medinol, Judith and Kobi Richter
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