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            Sale of Intellectual Property Rights (October 19th, 2009)

            1.Factual Background 

            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 interfacing.

            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”.

            2.Question Posed


            What 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 tier taxation.

            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.

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