TA (Central District) 59924-03-22 Q Cyber Technologies Ltd. v. Kfar Saba Assessing Officer
(Nevo, July 28, 2026)
What Happened?
On July 28, 2026, the Central-Lod District Court issued its judgment in Q Cyber Technologies Ltd. v. Kfar Saba Assessing Officer. The case addressed the limits of legitimate leveraged acquisition structures and the application of Section 86 of the Israeli Income Tax Ordinance to a structure in which an Israeli company (Q Cyber, the appellant) served as a holding company for the acquisition of another Israeli company.
The case concerned a transaction in which a foreign investment fund acquired, through a Luxembourg-resident company, an Israeli cybersecurity company, NSO. The acquisition structure also included an Israeli company, Q Cyber Technologies, which at the time was a dormant shelf company with no operations. Q Cyber acquired NSO using a loan from its Luxembourg-resident parent company. The loans were subsequently repaid using funds derived from dividend distributions and loans obtained from the acquired company (NSO).
The Assessing Officer argued that this sequence of transactions was primarily intended to enable profits to be transferred from Israel abroad without payment of the dividend tax that would have applied to a distribution to a foreign-resident company, and therefore constituted an artificial transaction. The Court accepted this position and dismissed the appeal, while canceling the penalty imposed on the company for failure to withhold tax at source.
Who Is This Relevant To?
The ruling is particularly relevant to investment funds, multinational groups, strategic acquirers, tax advisers and other professionals advising on acquisitions of Israeli companies, particularly leveraged transactions that use an Israeli holding company between the acquired Israeli company and a foreign parent company.
The Issue Before the Court
The principal issue was whether a structure in which an Israeli company receives a dividend from an Israeli subsidiary – exempt from tax as an intercompany dividend – and then transfers the same funds to its foreign parent as repayment of a loan may be regarded as legitimate; or whether, in the appropriate circumstances, such a structure is primarily intended to circumvent the second tier of Israel’s two-tier taxation of profits distributed to shareholders.
The Court emphasized that the use of leverage is not inherently improper and that debt-financed acquisitions are common in the business world. The decisive question, however, was why the particular structure was chosen – namely, an acquisition through an Israeli company that had no substantive operations at the time of the acquisition – rather than through a foreign company.
Key Findings of the Court
The Court reiterated the established principle that taxpayers are entitled to arrange their economic affairs in a manner that produces the most favorable tax result, but that this right is limited where the arrangement constitutes an artificial transaction intended to achieve an improper reduction of tax.
In this context, the Court stressed that artificiality must be assessed based on the entirety of the transactions and circumstances, rather than by examining each step in isolation. Accordingly, the full sequence of actions – the use of Q Cyber, the share acquisition, the acquisition financing and the manner in which the loans were repaid – must be considered as a single integrated arrangement.
In the Court’s view, the Assessing Officer met the initial burden of showing that the structure generated a clear tax saving: had the Israeli company’s profits been distributed directly to the foreign company, the dividend would have been subject to 10% tax under the Israel-Luxembourg tax treaty; by interposing the Israeli company, however, the funds could be transferred as loan repayments without payment of that tax.
The burden therefore shifted to the appellant to prove that the acquisition structure had a fundamental commercial purpose other than reducing tax. The Court held that the appellant failed to meet that burden.
Among other things, the Court gave weight to the following circumstances:
- At the time of the acquisition, the appellant that had been inserted into the structure was a shelf company with no employees, no substantive operations and no bank account.
- The appellant did not produce contemporaneous evidence regarding the considerations that led to the inclusion of the Israeli company in the structure.
- Based on the appellant’s financial statements, the Assessing Officer raised substantial doubt as to whether the appellant was in fact the entity that acquired NSO, or whether the transfer of the NSO shares to the appellant occurred only after an agreement had already been signed for the Luxembourg company to acquire NSO directly – a sequence that could indicate the absence of any genuine commercial rationale for the acquisition structure.
- Key representatives of the investment fund who could have testified regarding the contemporaneous business rationale were not called as witnesses.
- The commercial reasons that were raised – including an intention to centralize marketing and distribution activities, identify additional investments in Israel, as well as considerations relating to defense export regulation – were not supported by sufficient evidence showing that they actually formed the basis for the structure when it was originally designed.
The Court further held that even if substantive activities did develop within the appellant in the years following the acquisition, this did not in itself establish that a fundamental commercial purpose underlay its inclusion in the structure when the transaction was designed. In the absence of sufficient contemporaneous evidence, those later developments were insufficient to rebut the conclusion that the structure had originally been designed primarily to obtain a tax advantage.
Outcome of the Ruling
The Court held that the arrangement constituted an artificial transaction under Section 86 of the Israeli Income Tax Ordinance and that the tax advantage sought through the structure should therefore be disregarded. As a result, the payments transferred to the foreign parent company are to be taxed as taxable dividends rather than treated as loan repayments.
The Court nevertheless canceled the penalty for failure to withhold tax at source, holding that although the appellant’s position was rejected, the circumstances did not justify a finding of fraudulent or false conduct.
What Are the Practical Implications?
The ruling is an important reminder that even where each individual component of a structure is legally and commercially permissible, the question will be what fundamental purpose justified combining those components in the structure selected.
In particular, the ruling highlights several practical points:
- Using an Israeli holding company in a structure for the acquisition of an Israeli company requires a genuine and well-documented business rationale.
- Contemporaneous evidence is critical – including management documents, presentations, decision memoranda, opinions and internal records – explaining why the specific structure was selected.
- Substantive activity that develops only after completion of the transaction may not be sufficient if it cannot be shown to have been an inherent part of the original planning.
- Where a structure effectively results in profits being transferred from Israel abroad without dividend tax liability, it is likely to attract heightened scrutiny from the Israel Tax Authority.
- The fact that leveraged acquisitions are a common business practice does not, by itself, answer a claim that a transaction is artificial.
How Can We Help?
The ruling underscores the need to examine investment and acquisition structures at an early stage, particularly cross-border holding and financing structures, as part of the planning process. Our firm advises on acquisition transactions, international investments, financing structures and dealings with the Israel Tax Authority, and can assist in reviewing existing and proposed structures, assessing tax risks, developing appropriate contemporaneous documentation and representing clients in proceedings before the Israel Tax Authority.
The above content is a summary provided for informational purposes only and does not constitute legal advice. It should not be relied upon without obtaining further professional legal counsel.
