Israeli Court Rules NSO Used Artificial Deal to Avoid $8.6 Million Dividend Tax

The Central District Court in Lod ruled in favor of the Israeli tax authorities, determining that NSO Group's acquisition and the repayment of loans financing it constituted an artificial transaction designed to evade approximately $8.6 million in dividend tax. The court dismissed an appeal by Q Cyber Technologies Ltd against a tax assessment issued by the tax assessor involving millions of shekels in deductions.

The dispute centered on whether the sequence of actions in NSO's acquisition, funded by loans from its foreign parent company OSY and their subsequent repayment, was a legitimate commercial transaction or a tax avoidance scheme. The tax assessor, represented by attorney Adi Chen from the Central District Prosecutor's Fiscal Department, argued that the transaction's purpose was to avoid dividend tax and transfer substantial profits out of Israel.

According to the state's position, if the foreign parent company had directly purchased NSO, the transfer of profits amounting to about $86 million would have been subject to dividend tax. Instead, the use of Q Cyber, an Israeli shelf company, allowed the funds to be transferred as loan repayments, thereby saving 10% in taxes, equivalent to $8.6 million.

Judge A. Gorman accepted the state's argument, ruling the transaction artificial and primarily aimed at tax reduction. The court noted that Q Cyber's substantive business activities only began two years after the acquisition, casting doubt on any original commercial intent. Furthermore, the significant tax savings compared to the relatively low taxable income generated by Q Cyber over several years indicated a principal tax motive. The court also ordered Q Cyber to pay 40,000 shekels in legal costs to the public treasury.