Tax Authority forgoes NIS 4b in Mobileye deal

Mobileye logo

In a precedent pre-ruling, the Israel Tax Authority agreed to regard the acquisition as a sale of shares rather than assets.

A number of important precedent-setting decisions by the Israel Tax Authority and the Ministry of Finance played a role in making the acquisition of Mobileye by Intel, the most lucrative acquisition ever of an Israeli company, possible. One of these decisions was to allow Intel to pay most of its tax on the deal in dollars, rather than shekels.

Another was a pre-ruling by Tax Authority head Moshe Asher allowing the deal to be classified as a pure sale of shares. Asher was faced by a tax dilemma, revealed for the first time in "Globes": whether to create a precedent for taxing the deal as nothing other than a share transaction, even though some of the deal involved a sale of assets. Classifying the deal as partly a sale of assets, however, could have prevented the deal altogether.

One-stage deal

The reason why this dilemma arose was Mobileye's "dual citizenship" as both a Dutch and an Israeli company, after Mobileye "immigrated" to Israel a few years ago. Mobileye was originally registered in Cyprus, and then later in the Netherlands, through careful tax planning and offshore companies (registered in a tax shelter country). All this was legal and under the Tax Authority's watchful eye, with tax arrangements being set affecting the transfer of high-tech intellectual property from Israel to overseas. Such a measure has certain consequences. For years, Mobileye was in the tax jurisdiction of foreign countries. Several years ago, however, Mobileye "patriotically" moved to Israel, and all of its profits have been taxed in Israel ever since.

In the sale of Mobileye to Intel, however, Mobileye's dual identity as a company registered both in the Netherlands and Israel forced the company to reach a special arrangement for tax purposes, which the Tax Authority head had to approve. Section 5(5) of the acquisition agreement set a condition for completing the deal - a pre-ruling by the Tax Authority to the effect that even though the deal was partly a sale of assets, it would taxed as a one-stage deal at the same rate as a pure sale of shares.

The complexity of Mobileye's legal structure meant that the sale was conditional on compliance with Dutch, US, and Israeli law. One of the laws in the Netherlands states that in order to approve a deal for the sale of shares, holders of at least 95% of the issued shares in Mobileye must positively approve the deal. In their negotiations, the parties showed their awareness of this Dutch requirement, and therefore stated that if more than 66%, but less than 95%, of the shareholders approved the deal, Intel would purchase the holdings of shareholders who positively agreed to the deal. This put the ball into Asher's court; he had to decide whether to agree to regard the deal as purely a sale of shares.

An unusual and exceptional case

For tax purposes, a share sale transaction is classed as a capital transaction. The tax rate in a capital transaction on the capital gain generated for each of the Israeli shareholders is 25-30%. In the case of a share transaction, taxes are paid only on the holdings of Israeli residents in the shares of the company being sold.

In an asset sale transaction, on the other hand, the company sells its assets to some buyer and then distributes all or some of the proceeds to its shareholders as a dividend or payment resulting from liquidation. Such a deal is subject to taxation in two stages. The first is capital gains tax, which the company whose assets were sold pays at the same rate as corporate tax - 24%. The second is a 25-30% tax on the distribution of the dividend to the shareholders, usually as part of the company's liquidation. The overall tax on the deal is in the 40-50% range. Asher's decision means NIS 2.5-4 billion less in taxes for the Tax Authority. Sources inform "Globes" that even though a precedent was set foregoing a given amount of tax, Asher did not hesitate for long before issuing a pre-ruling allowing the Mobileye-Intel deal to be taxed as only a sale of shares. According to informed sources, one of his considerations in his ruling was the fact that the deal was very unusual, and his opinion that the state should not create an obstacle that could thwart it.

The Tax Authority said in response, "Due to the obligation of confidentiality imposed by law, we are unable to comment on the matter." Tax Authority sources, however, told "Globes" that special cases require special arrangements, and that this was one such case. One Tax Authority source involved in approving the deal said, "We had to make a special ruling, because the company involved was a Dutch and Israeli company. That is not relevant to most deals in Israel, in which there are no such special and specific conditions. Any other case coming to the Tax Authority with special circumstances will be considered on its merits, but where are there any other such deals with taxes in the billions and specific figures like these?"

A battery of tax lawyers faced the Tax Authority head and the Ministry of Finance. Advocate Yaniv Shekel from the Shekel & Co. law firm and Advocate Tal Atzmon from the Goldfarb law firm represented Mobileye, and Advocate Dr. Eran Lempert from the Yigal Arnon & Co. law firm represented Intel.

Published by Globes [online], Israel Business News - www.globes-online.com - on August 9, 2017

© Copyright of Globes Publisher Itonut (1983) Ltd. 2017

5 Comments
View comments in rows
Update by email about comments talkback
POST
Comments
Mobileye logo
Mobileye logo
Twitter Facebook Linkedin RSS Newsletters גלובס MAD Conference 2017