Executive summary

On 2 November 2025, and as part of a broad new tax reform, the Israel Tax Authority (ITA) published Income Tax Circular 8/2025 (the Circular) providing comprehensive guidance on income attribution for Israeli research and development (R&D) centers operating within multinational enterprises (MNEs). (For background, see EY Global Tax Alert, Israeli tax reform aims to accelerate growth in high-tech sector, dated 5 November 2025.)

The Circular introduces clear procedures for transfer pricing (TP) reviews, defines approval requirements for method changes and profit margins, and establishes a new advance ruling track for post-acquisition restructurings involving intellectual property (IP) transfers.

Key highlights of the Circular

Standardization of R&D income attribution

The ITA aims to enhance tax certainty and consistency for Israeli subsidiaries providing routine R&D services to foreign related parties. The Circular clarifies the acceptable TP method, typically the Transactional Net Margin Method (TNMM) using a markup on total costs — and formalizes the documentation requirements.

Approval requirement for changes in TP methodology

Any change from the reported TP method that an ITA officer determines must be approved in writing by senior ITA officials, as follows:

• Assessment stage A ("initial assessment") must be approved by the Head of the ITA professional division.
• Assessment stage B ("final assessment") must be approved approval by the ITA Director.

This procedure applies only if the multinational group's consolidated revenue exceeds 10 billion New Israeli shekels (NIS10b) (approx. US$3m) and the Israeli entity's income derives from R&D services for a foreign related party.

Limitation on markup adjustments

The ITA introduces a 14% ceiling for cost-plus margins unless both the professional division referent and its head specifically approve a higher markup.

Note that the above threshold and the general procedures will apply through the 2029 tax year.

Advance ruling route for IP transfers post-acquisition of an Israeli company

A dedicated ruling (Ruling) process applies if a foreign MNE acquires an Israeli technology company, transfers its IP abroad and converts the company into a limited-risk R&D service provider (the Transaction).

Obtaining a Ruling can confirm that:

• The IP transfer price reflects arm's-length value.
• The Israeli entity's future R&D income will be priced on a cost-plus basis with a stability clause for seven tax years after closing.

Eligibility conditions for obtaining a Ruling include:

• The Israeli target must have been classified as a Preferred Technological Enterprise under the Encouragement of Capital Investments Law (the Law). Even if the company did not claim benefits under the Law prior to the Transaction, but was classified after the closing as a Special Preferred Technological Enterprise, it will be considered as meeting this criteria for purposes of the Circular.
• The capital gain from the IP sale will be taxed at a 6% rate. This also serves as a supporting argument for applying a 6% reduced rate to other IP sales by a Special Preferred Technological Enterprise.
• The foreign purchaser must hold 100% of the acquired company shares post-acquisition.
• The Israeli company sold all of its rights in the IP that it owned prior to the acquisition to the purchaser within 180 days from the closing date, with the sales agreement specifying that the transfer is effective as of the closing date.

The Ruling also specifies the minimum IP valuation formula that should be followed to apply the Ruling: 85% × (A — B + C + D), where A = total share consideration, B = cash, C = liabilities, D = unrecorded obligations. In other words:

• 85% x (total share consideration — cash + liabilities + unrecorded obligations)

Advance pricing agreement (APA)

Israeli R&D service providers may apply for advance tax rulings under Income Tax Ordinance (ITO) Section 85A(d)(1) to confirm that their intercompany pricing complies with arm's-length principles.

The ITA also promotes the use of bilateral or multilateral APAs under relevant tax treaties to provide prospective certainty.

Implications

The Circular reflects the ITA's broader effort to align Israel's R&D taxation with global standards, creating greater predictability for multinationals. It presents opportunities for companies to review their TP policies, seek advance rulings and formalize IP migration and R&D models under clear guidance.