Israel proposes new innovation box regime to attract IP investment

The BEPS (base erosion and profit shifting) project, a G20-led initiative, is designed to address government concerns about the potential for MNCs to locate profits where they are subject to favorable tax treatment. This process has reached an advanced stage, with OECD developing and publishing recommendations for changes in international tax laws and treaties that governments can implement to reduce the potential for profit shifting activity. A central issue within these recommendations is the issue of IP registration location. The essence of guidelines on this issue states that intercompany remuneration of the IP owner should be in line with the locations of its actual functions, assets and risk profile. It is already widely agreed that multinationals are currently evaluating their global operations in a post-BEPS world, seeking to align ownership and control over intangibles with value creating functions.

The Israeli government believes that this regime change is an important opportunity for multinationals operating in Israel, and is determined to take the necessary steps to facilitate this opportunity. Following this determination, Israel is launching a new IP tax regime, within as part of the upcoming state budget. Under the proposed regime, 6% corporate income tax rate and 4% withholding tax on dividends are expected to apply to qualifying companies with consolidated revenues of over ILS10b (app. US$2.5b). Other qualifying companies would be subject to 12% corporate income tax and 4% dividend withholding tax.

Attractive as this proposal is, the opportunity that Israel resembles for multinationals has a much wider basis. Israel has already been for decades an attractive location for multinationals, due to its inherent merits: Israel has seen consecutive years of significant GDP growth above that of the OECD and the US, and our 5% unemployment rate is among the world’s lowest ; Israel has the highest concentration of engineers and PhDs per capita in the world; Israel is home to more than 5,000 high-tech companies and startups (the highest concentration in the world after Silicon Valley), and has by far outperformed other countries in VC volume per capita; a government which has shown openness for multinationals and offers attractive incentives.

All of these unique advantages have led to reality many of the world’s leading multinational companies have made Israel their home. Microsoft, Motorola, Google, Apple, Facebook, Berkshire- Hathaway, Intel, HP, Siemens, GE, IBM, Toshiba and Cisco head the long list of over 270 multinationals which have realized that Israel is the ideal choice for their R&D, advanced manufacturing and services centers. So in fact Israel is already home for a significant portion of the value-creating activities of global companies.

We are certain that the combination of the new Innovation box with the already thriving innovation ecosystem is a very strong value proposition for multinationals – both for those who already have a presence in Israel and those who don't. The opportunity lies in increasing the value-creating footprint in Israel, alongside shifting IP registration to Israel. Global companies following this path will allow themselves both to include Israel's innovation advantage within their enterprise, as well as to enjoy an attractive way of adhering to the new tax regime.

BEPS Israel