Legal and Economic Aspects of Intellectual Property Taxation in Israel

Israel- an island of economic stability

In recent years, Israel has shown and continues to show one of the most impressive economic growths. Israel is an attractive place for foreign investors, in many fields, including the field of IP, due, among other things, to its economic stability, which so far compared well with other economies during the ongoing global financial crisis. At the same time, significant increases have occurred in the indexes of the Israeli capital market, and a gradual improvement can be seen in the nonbank credit market.

One of the reasons for the resilience of the market is the fiscal policy that was adopted in Israel – increasing the deficit commensurately with decreasing tax revenues, which differed from the policy of other developed countries, and which led to a small increase in the debt-to-GDP ratio of Israel, while most OECD countries suffered a significant deterioration in this index.
The national expenditure on civilian R&D, which was on the rise in 2010 with a 11.2% increase, amounted to 35.8 billion NIS, and constituted 4.4% of GDP.

Israel – the place to invest in IP

As a major player in the international IP market Israel understands the importance of creating an attractive environment for foreign investments. Therefore, many changes have been made to the Israeli legislation, in order to provide foreign investors with incentives and tax benefits, such as the deduction of R&D expenses, and the amortization of goodwill, patents and know-how over several years, as well as programs and grants of the Chief Scientist. which support R&D projects. For example:

• Funding of R&D projects:  The standard funding ranges from 20% up to 40% of the approved investment, and for biotech and nanotechnology funding can be as high as 50%. Companies located in "Preferred areas" in Israel are entitled to an extra 10%.
• Tax benefits for R&D centers: The corporation that operates the R&D center is entitled to an investment grant valued at up to 20% of the approved investment.
• Employment grants for R&D centers: This program gives the investor an employment grant to be determined as a percentage of the cost of the employer's salary for each new employee, for a period of 4 years. As the number of employees raises, so does the initial grant, which can cover up to 40% of the wages.

* In order to be eligible for grants various conditions must be met, as set out in the legislation and in the rules of the various support programs.

Israel – an international standard in the field of taxation and IP

As part of its effort to create a convenient investment environment, Israel has signed 51 double taxation treaties (three of which were signed but have not yet entered into force), with many countries, including the USA, Canada, Russia, France, Germany, Japan and more. The adoption of these treaties, has legal effect according to section 196 (a) of the Income Tax Ordinance (new Version), 1961. Most treaties are based on the OECD "Model Double Taxation on Income and Capital" draft treaty. Israel became a member of the OECD in 2011.

Similarly, in the IP field Israel adopts international standards. This allowed the World Intellectual Property Organization (WIPO) to admit Israel to the distinguished list of the 15 leading countries in the world that function as patent search and examination centers. Israel's admission acknowledges its technological ability to examine, which is required to examine international patent applications.

In addition, Israel recently began a cooperation with the U.S. Patent Office, as part of the "Patent Prosecution Highway" (PPH) pilot program- a set of initiatives meant to accelerate and improve the patent examination process through cooperation between patent offices.

Israel – the power of hi-tech, IP and human capital

Israel is known as a leader in the high-tech industry and each year sees the establishment of approximately 5,000 start-up companies. In comparison, in Europe only around 600 start-up companies are founded each year. Israel also attracts 20 times more venture capital money pro capita than the average European country, which is mostly invested in high-tech and start-up companies. For this reason Israeli high-tech has become an international role model.

Also in the IP field Israel strives to lead. According to the 2010 report by the Israeli Patent Office, Israel ranked 16th in the world in the number of patent applications filed in 2009, ranked 11th for the years 1995-2007in the number of patent applications relative to the gross national product, and in 2007 ranked 14th in the number of patent applications relative to its population. Israel's academic institutions also lead in filing international patent applications, the most prominent being The Hebrew University, the Technion and the Weizmann Institute.

One of the main reasons for Israel's success is of course the quality of its human resources. For example, since 2002, five Israelis have won Nobel prizes in the fields of economy and chemistry.

Israel – the right choice

The rare combination of a stable and growing economy, convenient and efficient tax environment, international standards and high quality human resources, makes Israel the right choice for a wise investment. This was evidenced, for example, by City Bank’s decision, in December, 2011, to establish an R&D center in Israel. The Office of the Chief Scientist awarded this project a 93 million NIS grant for a period of five years, as a part of the Israel’s policy to promote foreign investments. It should be noted that City Bank was not the first was to identify Israel's great potential – Barclays Capital was the first bank that decided to set up an R&D center in Israel, designed to export financial services.
Another noteworthy development is the establishment of the technologic science park in Be'er-Sheba, which will connect between the knowledge of the well-known Ben-Gurion University and the high-tech industry. As of today, two giant corporations, Deutsche Telekom and EMC, are operating R&D centers in the Negev, and that this is just the beginning.