The ITA Issues Key Draft for Multinational Groups
The רשות המסים בישראל (Israel Tax Authority – ITA) has published a draft circular directly affecting the attribution of income to Research and Development (R&D) centers and establishing a new Safe Harbor regime applicable to the know-how transfer within multinational groups, especially following acquisitions of Israeli companies.
Attribution of Income to R&D Centers
The draft establishes criteria for attributing income derived from the use of intangibles developed by R&D centers in Israel. According to the ITA, a functional and risk analysis should be performed to determine the actual share of the R&D center in value generation consistent with the OECD principles.
This approach intends to avoid artificial structures that place key functions outside Israel without real economic substance. The effective contribution of local personnel is crucial in the development, enhancement, maintenance, protection, and exploitation (DEMPE) activities of intangible assets.
New Safe Harbor for the Know-how Transfer
Another relevant aspect of the draft is the introduction of a voluntary Safe Harbor regime for Israeli companies that, after being acquired by an international group, transfer their know-how to related entities.
This regime establishes predefined parameters to calculate a fixed consideration for the know-how transfer, thus facilitating tax certainty and reducing potential disputes. The conditions include specific eligibility criteria, such as the absence of subsequent control by the Israeli entity over the intangible assets.
Transition and Concluding Remarks
This draft is significant in modernizing Transfer Pricing policies in Israel, aligning with the OECD recommendations but incorporating its own elements that reinforce the defense of the local tax base.
The authorities have admonished taxpayers, tax advisors, and stakeholders to submit comments by April 15, 2025, to finalize the criteria before the final publication of the circular.
Sources: Gornitzky