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New Israeli Innovation Box Regime: An update and review of key features

Executive summary

The new OECD1 BEPS2-compatible Israeli Innovation Box regime (the ”Technological Enterprise” regime) was first launched on 1 January 2017, following by Regulations that were released on 28 May 2017. On 5 November later that year, the Israeli Tax Authority (ITA) published a detailed Tax Circular on the new intellectual property (IP) box regime and its implementation, as well as on its compatibility with other incentives provided under the Israeli tax law. Since then, several ITA rulings were published that can provide additional insights on the applicability of the new Innovation Box regime.

In addition, for innovative companies that do not meet the criteria set forth in the legislation, the Israeli Innovation Authority (IIA) published, on 20 May 2019, the conditions that are needed to be satisfied for such enterprises to qualify for this regime and enjoy its tax incentives. Such approval can be granted for enterprises that will establish an innovation level that is similar to or higher than the level of innovation that is accepted worldwide in the main technological field of the company. The request should be filed with the IIA within 90 days of the beginning of each tax year, and for tax years 2017-2018 – within 90 days from the day on which the conditions were published (i.e., until 18 August 2019).

This Alert summarizes the key features of this regime and addresses frequently asked questions (FAQs) regarding it, based on our practice.

Detailed discussion

Overview and objectives

In this new IP box regime, which is fully compatible with BEPS Action 5 on Harmful Tax Practices,3 and approved by the OECD as a non-harmful IP regime, the Israeli Finance Ministry acknowledged that in a post-BEPS era, technology multinationals may view Israel as a location to consolidate IP and substance due to the hundreds of research and development (R&D) centers currently operated there.

Accordingly, the innovation box applies to multinational companies that will convert their existing R&D centers into IP hubs or establish new ones. The tax incentives will also apply to existing Israeli companies that will qualify for the new regime.

This Innovation Box regime is complementary to the existing Preferred Enterprise regime. However, the more historical tax incentives under the Approved and Beneficiary Enterprise regimes cannot be provided in conjunction with the incentives under the Innovation Box regime.

In addition, the Israeli Government provides extensive grants and incentives for R&D and Innovation activities, as well as for employment, that can be provided in parallel to the tax incentives as detailed below.

The key features of this regime, as well as the recent IIA update for innovative companies to qualify under the legislation are outlined below.

Key features and FAQs

Please download the PDF file for the table with key features of the regime.

Implications

Israel’s progressive approach towards the Israeli R&D ecosystem and the new Innovation Box regime, provides an opportunity for multinationals that are seeking to align ownership and control over intangibles with value creating functions in a post-BEPS world.

Companies should review this new legislation and examine the potential benefits and consequences.

Endnotes

1. Organsiation for Economic Co-operation and Development.

2. Base Erosion and Profit Shifting.

3. OECD BEPS Action 5: Countering on Harmful Tax Practices more effectively, taking into account Transparency and substance.

4. Currency references in this Alert are to US$.

EYG no. 002681-19Gbl

Download this Tax Alert as a PDF file.

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