Israel Tax Authority Sets 13% Profitability Benchmark for Foreign Tech Centers

The Israel Tax Authority, led by Shay Aharonovich, is advancing a series of unprecedented guidelines that will directly affect the financial operations of foreign technology companies and development centers in Israel. The expected move includes publishing new tax rulings designed to establish uniform ratio measures for calculating tax liabilities of multinational corporations, alongside solutions for regulating intellectual property in acquisition transactions.

At the core of the policy is the "cost-plus" model, through which development centers that do not generate direct local revenues but provide services to the parent company are taxed. The Authority seeks to establish a profitability benchmark of 13% on total local operating expenses, including salaries, rent, and subcontractors—from which corporate tax will be derived. This is a relatively high rate, reflecting the added value of technological personnel in Israel.

Simultaneously, the Authority is opening the door to a "cost-sharing" model, which will allow acquired Israeli companies to share their technology with the purchasing company abroad without triggering immediate capital gains tax on the sale of intellectual property. The primary motive behind the move is the urgent need to create business certainty, as the sector has suffered from a lack of uniform policy among various assessing officers.

Recently, Finance Minister Bezalel Smotrich met with about 20 representatives from leading tech companies, funds, and entrepreneurs to discuss industry challenges amid the strengthening of the shekel and the AI revolution. Smotrich emphasized the government's commitment to strengthening the high-tech sector, defining it as the economic locomotive of the Israeli economy, and noted that the Ministry is working on adapting the tax system to the era of artificial intelligence.