Approximately 170,000 Americans live in Israel. In total, more than one million U.S. citizens and green card holders – who both live overseas and own more than 10% of a foreign corporation – faced the prospect of paying the tax..
(photo credit: REUTERS)
The Israeli Tax Authority (ITA) has published two generic rulings that may allow Israeli software companies to enjoy Israeli tax breaks without having to get their own rulings (2253/18 and 6003/19). The published rulings refer to a 2017 amendment to the Encouragement of Capital Investments, 1959 passed to fit in with hi-tech developments and OECD requirements.
Preferred technological enterprise
A preferred technological enterprise may enjoy company tax rates of 7.5% in development area A, and 12% elsewhere in Israel on preferred technological income. If it sells privileged intellectual property (IP) purchased from a foreign resident company, the capital gain is taxed at 12%.
Dividends are taxed at 20% subject to any tax treaty, but only 4% if paid to a 90% foreign corporate shareholder.
The enterprise must belong to an Israeli resident company and meet conditions including:
• R&D in the three preceding tax years (or from formation if less) averaged at least 7% of revenues or NIS 75 million per year from unrelated parties or related parties approved by the ITA.
• Tech: 20% of employees or 200 employees engaged on R&D, or a venture capital fund invested NIS 8 million, or revenue growth averaged at least 25% in the three preceding years and exceeded NIS 10 million in each of those years, or employee numbers grew on average at least 25% in the preceding three years and there were at least 50 employees in each of those years.
• Alternatively, the Innovation Authority confirms the enterprise is innovative.
• Group revenues under NIS 10 billion.
• Exports make up at least 25% of income from sales to a country with a population of at least 14 million, or sales to no country exceeds 75% of total sales, or main activity is bio- or nano-technology per the Innovation Authority. Preferred technological income
Income derived is from one of the following:
• Software as a service (SAAS).
• Giving a right to use privileged IP (Israeli or foreign patent, copyright, plant gene, other asset prescribed by the finance minister or knowhow approved by the Innovation Authority).
• Product produced with preferred IP.
• Products or services ancillary to the above.
• R&D service income not exceeding 15% of revenues.
• But not income from marketing intangibles, production income (separate benefits may apply).
R&D must take place mainly in Israel per detailed regulations.
A “special preferred enterprise” with group revenues over NIS 10 billion is subject to company tax of 6%. If it sells privileged IP to a related foreign company, the capital gain may be taxed at 6%. Preferred technological enterprise ruling 2253/1
A private Israeli resident company which develops software that processes data and issues various reports, mainly on an online platform. IP belongs to the company. Development takes place in Israel and abroad.
The ITA ruled that a preferred technological enterprise exists if income from a marketing intangible is excluded. Preferred enterprises
A preferred enterprise which does not derive income from privileged IP may qualify for separate tax breaks.
Preferred enterprise income is subject to company tax rates of 7.5% in development area A, and 16% elsewhere in Israel on preferred income. Dividends are taxed at 20% subject to any tax treaty.
A preferred company is an Israeli resident company with an industrial enterprise (as defined) that is an exporter as above.
Preferred income includes income from supplying rights to use knowhow or software developed by the enterprise, or royalties from these assets if the ITA confirms there is a productive activity in Israel. Also, income from semiconductors, physical products (not minerals, oil or gas), approved R&D and tourism may qualify.Preferred enterprise ruling 6003/19
This ruling dealt with a private Israeli resident company which develops software that enables clients worldwide to conduct checks on publicity campaigns. The company’s income stems from software usage fees. IP and risks belong to the company in Israel.
The ITA ruled that there is an industrial enterprise based on productive activity giving rise to preferred income. Notably, the ruling refers to six employees, including three engaged in R&D. Previously, the ITA wanted to see eight-10 employees.
Special preferred enterprises have annual revenues over NIS 1 billion or group revenues over NIS 10 billion. They may enjoy company tax rates on preferred income of 5% in development area A, and 8% elsewhere in Israel. Dividends are taxed at 5%.Comments
These rulings spell out the generous OECD-compliant tax breaks for Israeli hi-tech, especially software as a service. There may be little incentive to go offshore or to the US.
As always, consult experienced tax advisers in each country at an early stage in specific cases. The writer is a certified public accountant and tax specialist at Harris Horoviz Consulting & Tax Ltd. Leon@h2cat.com.
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