Israel’s tax authority (ITA) released a draft Tax Circular on 27 February 2025 for public comment. The circular outlines criteria and requirements for local R&D centres and post-acquisition IP sales, offering potential certainty from the ITA.
The draft circular focuses on two key areas:
Locally-based R&D centres operating under a cost-plus compensation model
Local R&D centres compensated on a cost-plus basis must meet specific criteria to avoid alternative transfer pricing claims by the ITA. These include being fully controlled by a foreign ultimate parent entity (UPE), having minimal Israeli ownership (less than 10%), engaging solely in contract R&D under the Encouragement Law, and being compensated with costs plus a markup. Additionally, they must submit intercompany agreements, a full transfer pricing study, and supporting documentation with their annual tax returns.
IP sale post-acquisition and conversion to contract R&D
The ITA will issue a formal ruling confirming the IP’s valuation and approving cost-plus treatment for eight years, provided the taxpayer meets specific criteria. These also include the local entity qualifying as a “Preferred Technology Company” with its IP meeting the definition of a “Beneficial Asset” under local Encouragement Law, no prior material shareholding by the acquiring entity, and an IP sale within 30 days at no less than 85% of the adjusted enterprise value. The company will provide R&D services for eight years while maintaining local workforce levels consistent with pre-acquisition.
