Israel is looking into competing with Switzerland as a haven for foreign patent registering companies. The tax authority has been examining the idea for several months, and it will now be taken up by Finance Ministry director-general Yael Andorn’s committee for restructuring the Encouragement of Capital Investments Law.
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Intellectual property that generates royalties on a patent or a company’s unique development is a field familiar in high-tech-focused Israel. The Encouragement of Capital Investments Law provides tax benefits to exporting companies on revenues from intellectual property developed in Israel, as well as from sales of products and services. It doesn’t, however, apply to royalty income derived from patents developed abroad.
In recent decades Switzerland has become a mecca for companies around the world with intellectual property thanks to substantial tax benefits offered on royalty income, with many of these having registered the country as their official home. Switzerland not only enjoys the extra tax revenue but has also managed to leverage itself into becoming a research and development powerhouse. Even though the Swiss law doesn’t require that the R&D take place within its borders, the registration of these companies has been found to encourage local R&D activity nonetheless. This is considered one of the most important strategic steps Switzerland has taken on its way to becoming a high-tech-oriented country.
Many Israeli companies want the tax benefits applied to their royalty earnings from patents developed abroad, and the Andorn committee is considering widening the law’s scope in light of Switzerland’s success. Unlike Switzerland, however, Israel doesn’t intend to allow the diversion of profits on R&D activities to its own shores without the transfer of continued R&D activity on patents bought overseas by the benefiting companies. Under the change taking shape, the law would only apply to companies already paying tax in Israel.