The ruling in Administrative Case 59924-03-22 Q Cyber Technologies Ltd. v. Assessing Officer Kfar Saba (rendered by the Honorable Judge Avi Gorman in the Central District Court, Lod) stands as one of the foundational decisions in recent years concerning the fiscal battle against financing transactions and leveraged buyouts in international corporate groups.

Below is an in-depth and detailed analysis of the ruling, the operative conclusions, and the distinctions between permissible and prohibited arrangements that emerge from it:

The Court’s Decision and Case Analysis

The District Court dismissed the appeal of Q Cyber Technologies Ltd. (hereinafter: “the Appellant”) and fully accepted the position of the Assessing Officer.

The Court determined that the sequence of actions performed—acquisition of shares in the Israeli company NSO by a Luxembourg company (OSY), establishment of the Appellant as an Israeli shelf company devoid of substance, transfer of NSO shares to the Appellant in trust, creation of shareholder loans totaling approximately $87 million from the Luxembourg company to the Appellant, and their rapid repayment using profits and dividends channeled from NSO—constitutes an “artificial transaction“ under Section 86 of the Income Tax Ordinance.

Accordingly, the Court ordered that the classification of the payments as loan repayment (exempt from tax) be disregarded, and that they be reclassified as dividend distribution subject to withholding tax at source upon the transfer of profits from Israel to a foreign resident.

The Amount of Tax Reduction in This Case

The transfer of profits totaling over $86 million from Israel to Luxembourg under the guise of loan repayment enabled the group to avoid payment of the two-tier dividend tax.

• Under the applicable tax treaty, the tax rate on dividends stood at 10%.
• Consequently, the tax reduction (tax savings) that the group sought to achieve through the artificial structure amounted to $8.6 million. The Court denied this tax benefit and imposed the said tax on the Appellant.

The Parameters That Rendered the Transaction Artificial

The Court enumerated a series of red flags and factual parameters that proved the Appellant had no genuine business purpose at the time of its establishment:

• Entity Devoid of Substance (Empty Shell): At the time of the acquisition of NSO shares and during the years 2014–2015, the Appellant was a shelf company with no business activity, no employees, no assets, and not even an active bank account.
• Absence of Actual Cash Flow (Contracts versus Reality): The funds used to acquire the shares and repay the loans totaling $86 million were transferred directly from NSO’s bank accounts to the accounts of the Luxembourg parent company (OSY), without ever passing through the Appellant’s bank account.
• Complete Lack of Managerial Independence: The agreements and share-transfer deeds were signed by the same individual on behalf of both companies (the Israeli Appellant and the foreign parent company OSY).
• Contradictory Real-Time Evidence: A written communication sent by NSO to the Tax Authority at the time of the acquisition explicitly stated that the acquisition would be carried out by a foreign company, which proved that NSO’s own management was entirely unaware of the Appellant’s existence in real time, and that it was incorporated into the transaction structure retroactively solely for tax purposes.
• Failure to Meet the Evidentiary Burden: The Appellant refrained from presenting real-time documentation (such as minutes, working papers, or business plans from 2014) and from bringing substantive witnesses to explain why the Appellant was specifically established to hold the shares. The Court determined that this omission raises an evidentiary presumption against it.
• Contradiction of the Alleged Business Plan: The Appellant claimed it was established to serve as a platform for acquiring additional Israeli cyber companies under it. In practice, when the group acquired additional companies in 2019–2020, they were not acquired under the Appellant but rather under a new Israeli company that was established (Gottlieb Ltd.).

The Operative Conclusion – What Types of Transactions Should Be Avoided?

The central conclusion is that one must avoid transactions structured as the “planting” of an empty intermediary entity (Conduit) lacking independent economic and business substance in real time, whose sole purpose is to channel funds and profits exempt from tax.

• Retroactive Agreements: Drafting trust agreements or holding agreements retroactively to create a legal appearance convenient for tax purposes.
• Bypassing Cash Flow: Executing loan and repayment transactions in which the physical cash flow entirely skips the intermediary company’s bank account and is carried out directly between the subsidiary company (the operating company) and the grandparent company (the foreign entity).
• Split Transactions Lacking Commercial Logic: Signing a series of small loan agreements (for example, multiple agreements not exceeding $5 million each) with no apparent reason other than an attempt to circumvent reporting or approval obligations.

In What Cases Will the Transaction Structure Nevertheless Be Recognized? (What Is Permitted and What Is Prohibited)

For a structure involving debt financing, a leveraged buyout (LBO), or the use of an Israeli holding company to be recognized by the Tax Authority and the courts, the following rules must be met:

What Is Prohibited (Will Be Deemed Artificial):

• One must not rely on business activity created only retroactively (“assembling” economic substance at a later stage). The Court determined that the fact that in 2016 (two years after the transaction) the Appellant already had employees and genuine marketing activity does not cure the artificiality of the financing structure and establishment as they existed at the “real time” of the transaction in 2014.
• One must not manage the holding company with a passive “puppet” board of directors that is not knowledgeable about the company’s business and does not exercise independent judgment (as determined in the Niago ruling cited in the case).

What Is Permitted (and Will Be Recognized for Tax Purposes):

• Leverage and Debt Financing Are Legitimate: In principle, acquiring companies through debt and leverage is an accepted business practice and is not inherently improper.
• Requirement of Business Substance at Establishment (Day One): The intermediary company must demonstrate genuine business activity, offices, employees, and independent decision-making processes from the time of its establishment and execution of the acquisition.
• Meticulous Real-Time Documentation: It is mandatory to preserve and document correspondence, minutes, valuations, investor presentations, and business plans that demonstrate the commercial reasons for establishing the specific structure (such as national-security regulation by IAMI, legal restrictions, or a proven business strategy for the group as a whole).

Full Alignment Between Agreements and Cash Flow: Loan funds and principal repayments must physically flow through the bank accounts of the legal entities party to the transaction, and not through direct skips between related companies.