Proposed Tax Break Would Encourage Transfers of Foreign IP into Israel

Following two years of efforts by the Ministry of Finance to examine opportunities for further encouraging companies to operate in Israel, a committee tasked with proposing changes to the Law for the Encouragement of Capital Investments has recommended a new tax break for companies that transfer intellectual property (IP) into the country. If adopted, the tax break will represent a significant incentive for companies to transfer foreign-registered IP into Israel, while also generating potentially billions of dollars in additional revenue for the Israeli government.

Andorn Committee Proposes Five Percent Tax on IP-Related Revenue

The committee, led by the former Ministry of Finance director general Yael Andorn, is proposing a reduced tax rate of five percent on revenue generated from transferred patents and other forms of intellectual property. In order to receive the tax break, in addition to transferring foreign IP rights into Israel, companies would need to satisfy certain conditions. As proposed by the committee, these conditions would include:

• Involvement of the imported intellectual property in domestic manufacturing,
• A commitment to meet certain employment thresholds, and
• Increased domestic production volume.

The proposed tax break would represent a substantial savings for companies operating in Israel using intellectual property assets developed internationally: The tax rate on royalties and other revenue generated from non-domestic intellectual property currently stands at 26.5 percent.

This means that, on an IP asset that generates $1 billion of revenue per year, the owner would stand to potentially save in excess of $200 million in annual tax burden under the Andorn Committee’s proposed amendment. However, given the widely-held belief that the current economic disincentives are keeping this business out of Israel, the proposed tax break – in theory at least – appears poised to increase tax revenue to the government.

About Israel’s Law for the Encouragement of Capital Investments

As amended in 2011, the Law for the Encouragement of Capital Investments (LECI) provides tax and other financial incentives to industrial export companies that maintain physical locations in Israel. These companies often rely on patents and other proprietary processes and information, which themselves can become significant assets and sources of income. With its investment incentives, the LECI seeks to bring these IP assets into Israel in order to foster additional domestic growth and innovation.

However, work remains to be done. Issues with the current legislative framework have been highlighted by recent events, such as Google’s purchase and subsequent re-domestication of Waze to a jurisdiction with more business-friendly tax laws. As well-stated by a source involved in the Andorn Committee’s efforts, “IP registration creates roots and an anchor in the country of registration, and makes the company’s business activity in that country far more difficult to shift.” With the committee’s proposed change to the LECI, more companies may find it advantageous to move into – rather than out of – Israel.

Prior Efforts to Promote Domestic Investments in Innovation

The government has undertaken other efforts in the past to promote domestic development and registration of intellectual property. These efforts include obtaining membership in the Organization for Economic Co-operation and Development (OECD) in 2011, and adopting international standards in order to facilitate more-efficient patent searches and examinations. If the legislature amends the LECI in accordance with the Andorn Committee’s recommendations, businesses will have yet another reason to focus their development efforts here in Israel.

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