While living in France, Israel Daniel Amram (IDA) devised an idea for the development of a unique and efficient computerized interface that would link insurance companies and physicians and facilitate financial accounting between medical service providers and patients.
IDA registered the trademark “SEPHIRA” and formed a company in France under the name SAS SEPHIRA .
IDA then moved to Israel and formed Sephira & Offek Ltd. Going forward the company in Israel would provid R&D services to SAS SEPHIRA in France. All of the taxable profits in Israel was labled as “R&D income” which is taxed at a lower rate in Israel.
Later IDA’s rights in the trademark was sold to Sephira & Offek Ltd in return for €8.4m. Due to IDA’s status as a “new Immigrant” in Israel profits from the sale was tax exempt.
Following the acquisition of the trademark, Sephira & Offek Ltd licensed the trademark to SAS SEPHIRA in return for royalty payments.
In the books of Sephira & Offek Ltd, the trademark was labeled as “goodwill” and amortized.
Following an audit the tax authorities determined that the sale of the trademark was an artificial transaction. Furthermore, they found that part of the profit labeled by Sephira & Offek Ltd as R&D income (subject to a lower taxation in Israel) should instead be labeled as ordinary income. On that basis an assessment was issued.
Sephira & Offek Ltd and IDA disapproved of the assessment and took the case to Court.
Judgement of the Court
The court ruled in favor of the tax authorities. The trademark transaction was artificial, as commercial reasons for the transaction (other than tax optimization) had been provided. The whole arrangement was considered non-legitimate tax planning.
The court also agreed that part of the income classified by the company as R&D income (subject to reduced taxes) should instead be taxed as ordinary income.Israel vs Sephira & Offek Ltd_2995-03-17