In November 2006 Microsoft Corp. purchased 100% of the shares of Gteko Ltd. (IT Support technology), for USD 90 million.
The purchase was made with the intention of integrating Gteko’s technology into Microsoft’s own products.
Following this purchase of Gteko Ltd., the employees were transferred to the local Microsoft subsidiary and a few months later another agreement was entered transferring Gteko’s intellectual property/intangibles to Microsoft. This transfer was priced at USD 26 million based on the purchase price allocation (PPA).
The tax authorities of Israel found that the price of 26 mio USD used in the transaction was not at arm’s length.
It was further argued, that the transaction was not only a transfer of some intangibles but rather a transfer of all assets owned by Gteko as a going concern to Microsoft Corp. The arm’s length price for the transfer was set at USD 80 million.
The District Court agreed with the assessment and held that “value does not disappear or evaporate” and that Gteko had not succeeded in arguing why the total values in Gteko should not be equal to the $90 million share price paid.