The District Court of Tel Aviv ("Court") recently held
that the cost of grants of options to purchase shares in a parent
company ("Options") pursuant to Section 102 of
Israel's Income Tax Ordinance were to be considered
"costs" under an intercompany Research and Services
Agreement entered into by the subsidiary and its parent company,
pursuant to which the parent company paid the subsidiary on a
"cost+" basis.
Based on the specific facts of the case, the Court held that the
cost of the Options were best classified as "costs expended in
the production of income", as the purpose of granting the
Options was to motivate the subsidiary's employees. The Court
also mentioned that the result was notwithstanding the fact that
the subsidiary was not entitled to deduct the value of the Options
as an expense for reasons related to the terms of the Section 102
Option plan benefiting the employees. The Court reached a similar
decision with respect to other social benefits provided
