Israel's budget confirms expansion of IP incentives for tech

Israel's budget for 2017-18 confirms some measures for tech companies announced last year, with the changes applying from 1 January 2017.

Firstly, the budget reiterates the 'innovation box' regime proposed last year, introducing a 6% corporate income tax on 'technological earnings'.

The budget also expands on the tax incentives for 'preferred technological enterprises' and 'special preferred technological enterprises':

For PTEs:
- the corporate tax rate is 12% instead of 24% on tech earnings (or lower, if in a development area)
- the withholding tax on dividends out of tech earnings of qualifying companies is reduced to 4% (unless lower by treaty)
- the capital gains tax rate on the sale of qualifying intangibles to a related nonresident is reduced to 12% where the assets were bought from a non-resident (unusual to see a tax incentive for outbound sales of IP)

For SPTEs:
- the corporate tax rate is 6% on tech earnings
- the withholding tax rate on dividends of tech earnings is reduced, as above; the withholding tax rate on all dividends to a nonresident parent is reduced to 5% (unless lower by treaty)
- the capital gains tax rate on qualifying intangibles (as above) is 6%
- the requirements to be an SPTE are modified, reducing the required preferred income by one third, and total required annual income by half

India: a follow-up

Just when you thought it couldn’t get more confusing … Following on from the previous post on the Microsoft shrink-wrap case, I came across a Advance Ruling given to GeoQuest Systems BV (a Dutch company) by the Indian authorities in August.

Remember that the Delhi Tax Appeal Tribunal pretty much held that all software payments are royalties, and withholding tax needs to be deducted from payments, even if for shrink-wrap boxed software? Well, the GeoQuest Advance Ruling concludes that a payment for the licensing of special purpose software does not constitute a royalty – so no withholding tax on payments made from India.

The customer was granted an exclusive, but non-transferable, right to use the software and the associated proprietary information. but no rights to modify the source code, make copies or transfer the software to any other person. The software had to be returned at the end of the licence period.

The Advance Ruling confirmed that:

• unless the right to directly exploit copyright in the software (by copying it, amending it or similar) is granted to the payer, the payment should not be considered a royalty under Indian domestic law; and


• a payment for the use of a product that has an embedded copyright is not the same thing as a payment for the use of the copyright.

Now, see, these points make sense. The Advance Ruling makes it clear that income from a supply of software constitutes business profits rather than a royalty, so that no withholding tax should apply. Now, could they just explain this to the Tax Appeal Tribunal?