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Trends
in Israeli
Tax Law
Change of a Business Model - International Acquisitions of Israeli
Hi-Tech Companies
International corporations are extremely interested in acquiring Israeli technology
and start-up companies. Following such acquisitions, multinational corporations tend
to restructure the business model of the acquired company by selling or licensing
its intangible assets to a related party abroad, and following the transfer, the Israeli
company may become a service provider of R&D services to the related company.
Essentially, not only is the Israeli company acquired, but it also undergoes a change in
its business model.
Over the past few years, the Israeli Tax Authority (“ITA”) has started examining these
business model changes more closely, particularly in cases of technology companies.
The ITA examinations aim to ensure that intangible assets are not being transferred
abroad at below market prices which inappropriately reduce the Israeli tax base. If a
transaction is found to be made at below market value, the ITA may challenge the
value of the intangible asset and attempt to adjust the transaction price to reflect the
higher value. The adjustments in the transaction price subsequently impose additional
tax liabilities on such transfers. The ITA may also require the reclassification of the
licensing of an intangible asset as an asset sale. Additionally, after making an initial
adjustment to a transaction, the ITA may attempt a secondary adjustment, which will
impose an additional liability on the intercompany charge.
In recent years, the ITA has issued numerous tax assessments reclassifying business
model changes which have resulted in increases of hundreds of millions of dollars in
tax liabilities. Some of these assessments are still being negotiated with the ITA, while
others are in the initial stages of being litigated in courts. Awareness of the current
trends and developments in the area may allow the parties to plan their transactions
ahead in a manner which will avoid such disputes with the ITA.
Tax Incentives for Foreign Residents in Israel
Israeli tax legislation is constantly being developed and modified to incentivize foreign
residents to invest in Israeli companies. To that effect, several amendments adopted
in recent years were legislated to alleviate the tax burden imposed upon foreign
residents, and thereby, to make investments in Israel more attractive. One of the key
examples of this trend is the exemption from capital gain tax.
According to current Israeli tax law, a foreign resident will be exempt from capital