Court: NSO evaded payment of 8.6 million dollar dividend tax

The Central District Court in Lod has accepted the state's position, ruling that the acquisition of the company NSO and the repayment of the loans that financed it constituted an "artificial transaction" designed to evade the payment of tax on dividends, totaling approximately 8.6 million dollars.

In a precedent-setting ruling, the court rejected an appeal by the company Q Cyber Technologies Ltd. against a decision by the tax assessor regarding withholding tax assessments issued to the company in the amount of millions of shekels. The appeal dealt with the question of whether a sequence of actions performed as part of the acquisition of the Israeli company NSO, its financing through loans from a foreign parent company (OSY), and their repayment, constitutes an "artificial transaction" under the Income Tax Ordinance.

The tax assessor, represented by attorney Adi Chen from the Fiscal Department of the Central District Attorney's Office (Civil), argued that the purpose of the transaction was to evade the payment of tax on dividends and to extract profits in huge amounts out of the country. According to the state's position, if the foreign parent company had acquired NSO directly, the transfer of profits in the amount of approximately 86 million dollars would have been subject to tax as a dividend. The use of Q Cyber—an Israeli shell company—was intended to allow the transfer of funds as a loan repayment, thereby saving tax at a rate of 10% of the amount, i.e., approximately 8.6 million dollars.

The District Court (Honorable Judge A. Gorman) accepted the state's position and ruled that this was an artificial transaction whose purpose was tax reduction, and that the appellant failed to meet the burden of proof to demonstrate the existence of substantial and fundamental commercial reasons for the transaction as it was carried out.

Among other things, the court noted that the appellant's substantial business activity began only about two years after the acquisition, which cast doubt on the claim of original commercial intentions. Furthermore, the gap between the significant tax saving (8.6 million dollars) and the volume of taxable income generated from the appellant's activity (approximately 5 million dollars over the years) pointed to a primary tax motive. The court imposed costs on the company in the amount of 40 thousand shekels to the public treasury.