Israeli Court Rules NSO Acquisition Was Tax Avoidance Scheme, Imposes $8.6 Million Dividend Tax

The Central District Court in Lod ruled in favor of the Israeli tax authorities, determining that the acquisition of NSO Group and the repayment of loans financing the deal constituted an artificial transaction designed to evade approximately $8.6 million in dividend tax. The court rejected an appeal by Q Cyber Technologies Ltd against a tax assessment demanding millions of shekels in withheld taxes. The dispute centered on whether the series of transactions involving the purchase of NSO, financed by loans from its foreign parent company OSY and their subsequent repayment, was a legitimate commercial deal or a tax avoidance scheme under Israeli income tax law.

The tax assessor, represented by Attorney Adi Chen from the Central District Attorney's Fiscal Department, argued that the transaction's purpose was to avoid dividend tax and transfer substantial profits abroad. The state contended that had the foreign parent company directly acquired NSO, the $86 million profit transfer would have been subject to dividend tax. Using Q Cyber, an Israeli shelf company, allowed the funds to be transferred as loan repayments, thus saving 10% in tax, amounting to about $8.6 million.

Judge A. Gorman accepted the state's position, ruling the transaction artificial and primarily aimed at tax reduction. The court found that Q Cyber's substantive business activities began only two years after the acquisition, casting doubt on any original commercial intent. Additionally, the significant tax savings contrasted with the relatively low taxable income generated by Q Cyber over several years, indicating tax avoidance as the main motive. The court also ordered Q Cyber to pay 40,000 shekels in legal costs to the public treasury.