1.1Four individuals, residents of Israel ("Individuals”),
act in concert as high-tech entrepreneurs and hold the shares of ”A”
corporation, an Israeli corporation engaged in linking internet and cellular
1.2The Individuals possess intellectual property relevant to
the activities of "A” e.g. customer lists, goodwill, market know-how,
technological know-how and management know-how ("Assets”). The ownership
of the Assets was at all times vested in the Individuals.
1.3The Individuals are employed by "A” for a monthly
salary and the amounts paid to them include remuneration for the use "A”
makes of the Assets. The legal relations between the Individuals and "A”,
were not reduced into writing.
1.4Some of the Individuals ("Sellers”) are in the
process of establishing a new corporation ("B”) in a foreign
jurisdiction. "B” will be held by them in equal shares and will engage
in activities similar to those in which "A” is engaged. "B” will
enter into an agreement with the Sellers to develop intellectual property.
1.5Recently, the Sellers received an offer comprising the
following: First, the Sellers will incorporate "C”, in a foreign
jurisdiction and will equally hold its entire share capital; second, an
investor ("Investor”) will acquire shares in "C” entitling him to
60% of its share capital.
1.6"C”will make use the investment to purchase the Assets in the possession of the
Individuals at the time of the purchase including intellectual property to be
developed in "B”.
are the tax ramifications of the transaction described above?
3.1. The opinion
examines the Israeli, English and U.S. tax aspects of the conveyance of
intellectual property and dwells on precedents relevant thereto.
3.2. It brings to the
individuals’ attention the exposure to the following contentions of the tax
authorities: (i) the contention that the transaction is in essence a license of
technology giving rise to ordinary income taxable at progressive rates; (ii)
the contention that the sale was of assets which were not owned by the
Individuals but rather by one or more of the corporations, resulting in double
3.3. With respect to
the sale of the know-how, the opinion states that capital gain treatment could
be justified on the basis of a non-competition clause the lack of a tie-in
between the consideration and future developments and the lack of any
limitations in time or territory on the use of the know-how.
3.4. In sum, the
opinion concluded that as most of the sale concerned capital assets it was
liable for capital gains tax. The opinion makes suggestions with respect to the
drafting of the relevant legal documents.