December 2014
The Israel Tax Authority published recently a tax ruling presenting how Israeli hi tech companies can qualify for preferred tax breaks under the Encouragement of Capital Investments Law (Ruling 6827/14). This ruling by the Israel Tax Authority is of significant importance for software companies which could be entitled to the various tax incentives. See also: Tax breaks for multinational firms.
This ruling deals with an Israeli software company which develops, manufactures and sells software for online advertising. Additionally, the Israeli company provides services to its clients relating to the acquired software.
Israeli tax rats
In Israel, the regular corporate tax rate in 2014 is 26.5%. Dividends are taxed at rates ranging from 25% to 32%. See also: New Israeli Tax Rates for 2014.
In contrast to the regular rate of corporate tax, preferred enterprises that derive preferred income from an industrial enterprise in Israel pay corporate tax of 9% in development area A and 16% elsewhere, if their exports total 25% of sales according to the Law for the Encouragement of Capital investments. In this case, dividends are taxed 20%.
The New Ruling
The new ruling published by the Israel Tax Authority discusses an Israeli resident company engaged in developing software that serves as a platform that connects suppliers of websites or software who are willing to display ads of customers who want to advertise their products online. The customers pay the company per click for the use of the relevant software. The suppliers pay the company a commission for the use of the relevant software.
In addition to the software development, the above-mentioned company employs people to provide services. These services are aimed on operating the software for suppliers and customer, maximize ad campaign expenditures, encourage new campaigns, match ads to suppliers and the like.
The Ruling by the Israel Tax Authority
The ruling by Israel Tax Authority determined that the company has an industrial enterprise and a preferred enterprise for the purposes of the Law for the Encouragement of Capital Investments. Therefore, the Israel Tax Authority ruled that income from suppliers and customers for the use of the relevant software is preferred income that qualifies for the above mentioned tax incentives. Yet, the Israel Tax Authority concluded that income from the services is not preferred income and is taxable at regular Israeli corporate tax rates.
The Israel Tax Authority sets in the ruling a method of allocation of the company's income to sales income or service income, based on the ratio between the number of employees who are involved in the development of the software and their salaries, and the number of employees who are involved in providing the services and their salaries. The ruling also provides various conditions and restrictions, which were not published by the tax authorities.
Dr. Avi Nov Law Offices, Israeli & international tax law
*This article is intended for informative purposes only and is in no way to be construed as tax advice or a legal opinion
