Broadcom Semiconductors Ltd is an Israeli company established in 2001 under the name Dune Semiconductors Ltd. The Company is engaged in development, production, and sale of components to routers, switches etc.
The shares in Dune Semiconductors were acquired by the Broadcom Corporation (a US group) in 2009 and following the acquisition intellectual property was transferred to the new Parent for a sum of USD 17 million. The company also entered into tree agreements to provide marketing and support services to a related Broadcom affiliate under a cost+10%, to provide development services to a related Broadcom affiliate for cost+8%, and a license agreement to use Broadcom Israel’s intellectual property for royalties of approximately 14% of the affiliate’s turnover.
The tax authorities argued that functions, assets, and risks had been transferred leaving only an empty shell in Israel and a tax assessment was issued based on the purchase price for the shares resulting in additional taxes of USD 29 millions.
According to the company such a transfer of functions, assets, and risks would only be applicable if Broadcom Israel had been emptied of its activities which was not the case. Following the restructuring Broadcom Israel continued as a licensor and as a service provider. The financial situation of the company also improved.
The position of the company was further supported by the fact that several years following the restructuring, Broadcom Israel sold its intellectual property and was taxed for the capital gain.
The District Court held in favor of the company. A business restructuring from a fully fledged principal to a service provider on a cost-plus basis does not necessarily result in a transfer of value.
Judgement of the Court
In the judgement the court argues that this case is different from the prior Gteko-case where the Israeli company became an empty shell and financial results were dramatically reduced following the acquisition and restructuring of the company.
Unlike the Gteko-case, Broadcom had increased its activities in Israel following the acquisition. The court also emphasized that the tax authorities did not take into consideration options realistically available to the company at the time of the restructuring.
For a business restructuring to constitute a sale of functions, assets, and risks property for tax purposes, it must be demonstrated not only that the change occurred, but also that the change did not meet the arm’s length principle.
The court confirmed that the OECD’s Transfer Pricing Guidelines are applicable as a reference for tax purposes in Israel.