Israel clarifies tech vs marketing income for tax breaks

The Israel Tax Authority has clarified when income from intellectual property qualifies as technological rather than marketing, determining eligibility for reduced tax rates under the Encouragement Law. Marketing income is excluded from these benefits, which offer company tax as low as 7.5%. The new circular eases the 10% threshold for marketing income, listing eight circumstances where income need not be allocated to marketing, including B2B sales, regulatory-based purchases, and low marketing expenditure relative to R&D. Local tax offices must refer such allocations to the ITA's national Professional Division for approval. This guidance aligns with OECD BEPS Action 5 rules, which permit tax breaks only for substantial activities involving patents or equivalent assets. The clarification aims to provide uniformity and certainty for Israeli hi-tech firms and multinational groups, though professional advice remains recommended.