Background
On August 4, 2026, the Israel Tax Authority (the “ITA”) published guidance (Income Tax Circular 08/2026) (the “Guidance”) concerning an “Intangible Asset used for Marketing” (a “Marketing Intangible”). The guidance addresses when a company that owns a technological enterprise should also be regarded as holding a Marketing Intangible, and the portion of income that should be attributed to such an asset, which is not eligible for the tax benefits available under the Preferred Technological Enterprise regime pursuant to the Law for the Encouragement of Capital Investments.
According to the ITA, the guidance is based on the OECD’s BEPS (Base Erosion and Profit Shifting) rules, as reflected in Action 5 (“Countering Harmful Tax Practices More Effectively, Taking into Account Transparency and Substance”), through which the OECD seeks to combat harmful tax planning based on tax regimes that provide reduced tax rates without adequate justification.
Further background to the guidance can be found in existing legislation (Amendment 73 to the Law for the Encouragement of Capital Investments) and in Income Tax Circular 09/2017. Among other things, these provide that income derived from a Marketing Intangible is not considered a “Technological Income” and that, where the income attributable to the Marketing Intangible does not exceed 10% of the profit derived from the Benefited Intangible Asset, no income need be attributed to the Marketing Intangible.
The ITA states that the purpose of the Guidance is to establish criteria for determining whether a Marketing Intangible exists and the amount of income to be attributed to it, as well as internal control mechanisms within the ITA for assessments involving the attribution of income to Marketing Intangibles and the internal approvals required for such assessments. The stated objectives are to increase certainty, promote a consistent policy, and ensure an appropriate level of tax is paid in Israel in line with OECD principles.
In recent years, the ITA has adopted a stringent interpretation under which it has denied companies the special corporate tax rates of 6%-12% applicable to technological assets and sought to tax those companies at the ordinary 23% corporate tax rate by attributing a portion of their preferred technological income to Marketing Intangibles. At times, this approach has been applied through a mechanical comparison of a company’s marketing expenses with its R&D expenses. In our view, this is inconsistent with transfer pricing principles, which are required under the regulations promulgated pursuant to the Law for the Encouragement of Capital Investments.
The following are the key clarifications included in the ITA’s new Guidance:
Criteria Supporting the Absence of Income Attributable to a Marketing Intangible
The guidance sets out criteria that may indicate that no Marketing Intangible exists, or alternatively that there is no material Marketing Intangible whose contribution to the company’s income exceeds 10% of the company’s total technological income. In such cases, no income should be attributed to a Marketing Intangible:
- The company sells its products to businesses (B2B sales), government entities (B2G sales) or non-profit organizations.
- Purchases from the company are based on technical specifications or the functionality of the product sold.
- Purchases from the company are driven by regulatory requirements.
- The product sold is a component of a final product, or the company acts as a subcontractor, where the company manufactures a component that is incorporated into another product and loses its independent “identity” as part of the manufacturing process.
- The company develops a Benefited Intangible Asset and grants another company a long-term right to use that asset to market the product, with the company’s income consisting of royalties for the grant of such right of use.
- There is no significant competition in the target market due to the uniqueness of the product, such that the Marketing Intangible makes only a marginal contribution to the company’s income.
- Marketing expenses are low in relation to R&D expenses (although the mere existence or amount of marketing and sales expenses does not, in itself, establish the existence or materiality of a Marketing Intangible).
The ITA clarifies that the list is not exhaustive and that each case will be examined based on its particular circumstances. In addition, where there are indications that a Marketing Intangible exists, the assessing officer may attribute income to it, but only subject to the involvement, review, and written approval of the ITA’s Professional Division.
Important Clarification Regarding the 10% Threshold
Addressing uncertainty arising from the ITA’s previous guidance, the new guidance clarifies that the percentage of income attributed to a Marketing Intangible is measured by reference to the company’s technological income, rather than its taxable income. This is an important interpretive clarification that may affect how the 10% threshold is applied in practice, as there can be material differences between taxable income, which is affected by deductions, loss offsets, and other adjustments, and technological income.
New Internal Review Mechanism Before an Assessment Is Issued
Another significant development is the introduction of an internal review mechanism within the ITA whenever the existence of a Marketing Intangible is examined, income is attributed to such an asset, or capital gain from the sale of a Marketing Intangible is attributed. The ITA clarifies as follows:
- A Best Judgment Assessment (Stage A) requires the written approval of the Senior Director (Encouragement Laws) at the ITA’s Professional Division;
- An assessment by a Tax Order (Stage B) – i.e., a determination that may be appealed to the court – requires the written approval of the Senior Department Director (Professional) or the ITA’s Senior Deputy Director General for Professional Affairs.
These requirements will also apply to assessments that were already under discussion with the assessing officer before the Guidance was issued, but will not apply to Tax Orders issued before publication of the Guidance.
Applying to the Israel Tax Authority for a Pre-Ruling on Marketing Intangibles
Importantly, the ITA allows companies to apply to the ITA’s Professional Division for pre-rulings regarding whether a Marketing Intangible exists, the percentage of the company’s total income that should be attributed to it, and the method for attributing such income.
Implementation Considerations
Whether a Marketing Intangible exists, and what income, if any, should be attributed to it, depends on the specific circumstances of each company and requires an in-depth analysis under transfer pricing principles.
The Guidance emphasizes that the mere existence of marketing expenses does not establish the existence of a Marketing Intangible. Accordingly, an appropriate analysis of whether such an intangible exists is essential.
Contemporaneous documentation that can demonstrate that the company has no Marketing Intangibles (or that any such intangibles are immaterial) is particularly important.
Our firm has extensive experience advising technology companies and multinational groups in tax planning, tax assessment proceedings and court appeals, as well as providing ongoing advice on matters relating to the Law for the Encouragement of Capital Investments. We would be pleased to assist with any matter concerning the implementation of this new Guidance.
The above content is a summary provided for informational purposes only and does not constitute legal advice. It should not be relied upon without obtaining further professional legal counsel.
