In April 2010 Roche pharmaceutical group acquired the entire share capital of the Israeli company, Medingo Ltd, for USD 160 million.
About six months after the acquisition, Medingo was entered into 3 inter-group service agreements:
- a R&D services agreement, pursuant to which Medingo was to provide R&D services in exchange for cost + 5%. All developments under the agreement would be owned by Roche.
- a services agreement according to which Medingo was to provided marketing, administration, consultation and support services in exchange for cost + 5%.
- a manufacturing agreement, under which Medingo was to provide manufacturing and packaging services in exchange for cost + 5.
A license agreement was also entered, according to which Roche could now manufacture, use, sell, exploit, continue development and sublicense to related parties the Medingo IP in exchange for 2% of the relevant net revenues.
Finally, in 2013, Medingo’s operation in Israel was terminated and its IP sold to Roche for approximately USD 45 million.
The tax authorities viewed the transactions as steps in a single arrangement, which – from the outset – had the purpose of transferring all the activities of Medingo to Roche. On that basis an assessment was issued according to which the intangibles had been transferred to Roche in 2010. Based on the acquisition price for the shares, the value was determined to approximately USD 160 millions.
An appeal was filed by Medingo claiming that there had been no transfer in 2010.
Judgement of the District Court
The court decided in favor of Medingo and set aside the 2010 tax assessment – but without passing an opinion in relation to the value of the sale of the intellectual property in 2013.
“96. The guidelines indicate that in a transaction between related parties, two different issues must be examined using the arm’s length principle: transaction characterization and transaction pricing. The characterization of the transaction must first be examined and it must be examined whether it would also have been made between unrelated parties. If the examination reveals that even unrelated parties would have entered into a transaction in the same situation, then it must be further examined whether the price paid for the assets complies with market conditions. It should be noted that in accordance with the guidelines, the characterization of the transaction should not be interfered with in violation of the agreements, except in exceptional circumstances, in which the agreements are fundamentally unfounded, or in no way allow a price to be determined according to the arm’s length principle.
“Tax A tax administration should not disregard part or all of the restructuring or substitute other transactions for it unless the exceptional circumstances described in paragraph 1.142 are met”. out circumstances in which the transaction between the parties as accurately delineated can be disregarded for transfer pricing purposes. Because non-recognition can be contentious and a source of double taxation, every effort should be made to determine the actual nature of the transaction and apply arm’s length pricing to the accurately delineated transaction, and to ensure that non-recognition is not used simply because determining an arm’s length price is difficult. e same transaction can be seen between independent parties in comparable circumstances… non-recognition would not apply… the transaction as accurately delineated may be disregarded, and if appropriate, replaced by an alternative transaction, where the arrangements made in relation to the transaction, viewed in their totality, differ from those which would have been adopted by independent enterprises behaving in a commercially rational manner in comparable circumstances, thereby preventing determination of a price that would be acceptable to both of the parties taking into account their respective perspective and the options realistically available to each of them at the time of entering into the transaction “.
97. Further to this, sections 1.146 – 1.148 of the Guideline, 2022, provide two examples of cases in which the characterization of the transaction must be ignored. The second example deals with a case closer to our case, where a one-time payment is paid for R&D services and their products provided – for 20 years.
98. After examining the characterization of the transaction in our case, I found no defect in it. This is a completely different case from those mentioned in the guidelines, and it has been proven to me that transactions with a similar characterization can be conducted and are also conducted between unrelated parties. Thus, throughout the proceedings, the appellant presented various examples of similar license agreements and R&D agreements signed between unrelated parties: In Phase A, the appellant presented various transactions for comparison (P / 2 (to which the respondent did not even refer), p. 332 of the minutes (and within the appeal Of EY Germany and of Gonen in which additional transactions were presented for comparison, including transactions of similar companies in the relevant market.”
“104. I also believe that it makes sense to enter into such agreements, especially in the situation of the appellant at that time. Appellant faced considerable obstacles, and her chances of success were not guaranteed, to say the least….”
“105. The inter-group agreements secured the appellant’s future in the near term, and gave her more chances to survive. As the appellant’s experts clarified, small companies find it difficult to survive alone in the medical device market (see for example Section 1 of the Michlin Opinion (hence, a licensing and commercialization agreement is common practice in the field and common with contractors with experience and resources); See also paragraph 41 regarding Broadcom).”
“110. In conclusion, as long as the appellant and Roche acted in accordance with the inter-group agreements, which are acceptable in industry and in the circumstances of the case there is logic in concluding them, I did not find any invalidity in the characterization of the agreements (see paragraphs 85 and 87 in the Broadcom case).”
“….As stated, I believe that even if there was an intention to transfer the activity, there was no final decision until the date of the announcement. Second, and this is the point, even if there was a real intention to transfer the old intellectual property at some point, from the time the old intellectual property returned to the appellant at the end of three and a half years of the license agreement period, Roche still needed to acquire it. That is, the respondent’s contention that “the word will not be returned” (section 105 of the respondent’s summaries) is inaccurate, and there is no connection between Roche’s intentions to transfer the activity and the permanent transfer of the intellectual property under the license agreement.”
“117. For the avoidance of doubt, the foregoing does not constitute an opinion in relation to the value of the sale of the intellectual property in 2013.”Israel vs Medingo May 2022_53528-01-16