Sections 51כז-51כח: Reduced Tax on Selling Intellectual Property to a Related Foreign Company

Category: Incentives & Grants | Reading time: about 8 minutes

Background: an incentive meant to anchor IP in Israel

When an Israeli company sells a capital asset, the gain is subject to full corporate tax — 23%. When the asset sold is intellectual property developed in Israel and the buyer is a related company abroad, the economic significance is considerable: the IP — and with it future income and the right to tax it — leaves Israel.

Amendment 73 to the Encouragement of Capital Investments Law, effective 1 January 2017, created the technological enterprise track. Alongside the reduced rate on ongoing income, section 51כז set reduced rates on the capital gain from selling the asset itself. The logic: if the asset is going to move in any event, better that the sale be reported and taxed in Israel at a reasonable rate than structured so that the Tax Authority is left out entirely.

← Read our full guide: The Encouragement of Capital Investments Law

The two rates — and what the law actually says

Section 51כז(a) sets out two separate tracks, notwithstanding section 91 of the Income Tax Ordinance and subject to section 51כח. The difference between them is not only the rate — it is the entry condition:

In both tracks the buyer must be a related foreign-resident company. A sale to an unrelated third party does not fall within the section at all.

The trap most summaries miss

Read the first row of the table again. The 12% rate is conditional on the asset having been purchased from a foreign resident company for at least NIS 200 million. It carries no "first owner" alternative — that alternative exists only in the 6% track, reserved for a special preferred technological enterprise.

The practical meaning is sharp: an ordinary Israeli company with a preferred technological enterprise that developed its own IP is not entitled to the reduced rate at all. Selling the asset to its foreign parent will be taxed at the full 23% corporate rate. And that is precisely the profile of most Israeli hi-tech companies.

Who does qualify for the 6% track? Only an enterprise whose group crosses NIS 10 billion in income for the tax year — that is, very large corporations. For them, the "first owner" alternative does open up.

What is a "benefited intangible asset"?

The definition in section 51כד is a closed list of six categories:

1. A right under the Patents Law, 1967;
2. Computer software protected under the Copyright Law, 2007;
3. A right under the Plant Breeders' Rights Law, 1973;
4. Rights under other laws prescribed by the Minister of Finance by order — a 2019 order added the right registered in the pharmaceutical registry under the Pharmacists Ordinance, relevant to the pharma industry;
5. Equivalent rights under foreign laws in the matters listed in 1-4;
6. Know-how developed in Israel by the technological enterprise, which the Innovation Authority determined is eligible to be the subject of an R&D programme.

The know-how route carries its own ceiling, and it is worth knowing: it is open only if the company's total income for the tax year did not exceed roughly NIS 32 million, and — where the company belongs to a group — the group's turnover did not exceed roughly NIS 211 million. A larger company whose asset is neither a patent nor protected software simply will not meet the definition.

← Read our full guide: Circular 08/2026 — marketing intangibles and hi-tech tax benefits

Preferred versus "special preferred" technological enterprise

Both terms are defined in the same section and differ by a single threshold — group size. A preferred technological enterprise must meet substantive R&D conditions:

• R&D expenses in the three years preceding the tax year — at least 7% per year on average of the company's total income, or over NIS 75 million;
• and additionally one of these: at least 20% of employees are R&D employees (or 200 or more such employees); a venture capital fund invested at least NIS 8 million in the company; average revenue growth of 25% over the three preceding years (with turnover of NIS 10 million or more in each); or average headcount growth of 25% (employing at least 50 people in each);
• alternatively — meeting conditions set by the Chief Scientist for Innovation, approved by the Innovation Authority;
• and: the group's income for the tax year was below NIS 10 billion, and the enterprise is a competitive enterprise.

A special preferred technological enterprise meets all those conditions except the size condition, and its group's income for the tax year was NIS 10 billion or more.

"Related foreign-resident company" — who you may sell to

A "related company" is defined as a company belonging to the same group as the company that owns the enterprise. A "group" is two or more entities where one holds, directly or indirectly, the means of control of the others, and either special relations as defined in section 85A of the Ordinance exist between them, or they are consolidated under generally accepted accounting principles.

This is a constitutive condition, not a technical one: the section was not designed to encourage arm's-length sales, but to regulate the situation in which IP moves within the same group out of Israel — for instance after an Israeli company is acquired by a foreign corporation seeking to consolidate the IP at its level.

Section 51כח: Innovation Authority approval — before the sale, not after

Here lies the condition companies tend to encounter too late. Section 51כח provides that section 51כז applies only if the National Authority for Technological Innovation approved — before the date of sale — that:

• the asset was purchased from a foreign resident company on or after 1 January 2017, for NIS 200 million or more — for the 12% track; or
• the asset was created or purchased as set out in the 6% track alternatives, on or after that same date.

The application is filed with the Innovation Authority under rules it prescribes, and must include, among other things, details of the benefited intangible assets fully or partly owned by the enterprise as at 31 December 2016.

Note two points. First, an asset created or acquired before 1 January 2017 does not enter the track — the section is aimed at assets arising under the new regime. Second, an approval obtained after the sale agreement is signed does not cure the defect: the law requires prior approval, and it is a condition for the benefit applying at all.

← Read our full guide: Innovation Authority grants — tracks, conditions and obligations

"A capital gain deriving from R&D in Israel"

Section 51כז(b) defines the capital gain subject to the reduced rates as a gain deriving from research and development in Israel, all in accordance with rules to be set by the Minister of Finance with the approval of the Knesset Finance Committee, meeting international standards for tax regimes.

The reference to international standards is not empty drafting — it expresses the Nexus principle from the BEPS project: a tax benefit on IP is granted only in proportion to the R&D activity actually carried out in the country granting it. A company whose development was performed largely abroad will find that, even if the formal conditions were met, the bulk of the gain does not "derive from research and development in Israel".

← Read our full guide: The new R&D tax credit track in the Encouragement Law

The dividend that follows: 20% — and sometimes 4%

The reduced rate on the capital gain is not the end of the story. Section 51כו provides that profits sourced in a capital gain to which the reduced rate under section 51כז applied, net of the tax paid on it, are taxed at 20% when distributed as a dividend.

However, those same profits distributed to a foreign-resident body corporate are taxed at only 4%, provided all of the following hold: 90% or more of the shares are held directly by one or more foreign-resident bodies corporate (and, where held indirectly, the dividend was passed on within one year); and the profits arose after that body corporate acquired the shares.

On a net basis this is a material difference between one holding structure and another, and it should be examined together with the sale itself — not as a separate later step.

What to check in practice

1. What exactly is being sold? A patent or protected software qualifies directly; know-how qualifies only subject to the income ceilings and an Innovation Authority determination; a brand or customer list does not qualify at all.
2. Does the group cross NIS 10 billion? This determines whether you are in the 6% or 12% track — and therefore which alternatives are open to you.
3. Who is the first owner of the asset? If you developed it yourselves and are not a special preferred enterprise, section 51כז does not apply, and planning must proceed on a 23% basis.
4. When was the asset created or acquired? Before 1 January 2017 — outside the track.
5. Has an application been filed with the Innovation Authority? It must be approved before the date of sale. This is the requirement most easily missed in a transaction timetable.
6. Where was the R&D actually performed? Documentation of activity in Israel is what supports entitlement.
7. What is the holding structure? It determines whether the post-sale dividend is taxed at 20% or 4%.

This article is provided for general information only and does not constitute professional advice or a substitute for personal advice. Application of these provisions depends on the specific circumstances of each company and transaction. For any question, please contact us and we'll be glad to assist.

Best regards,
Hager-Alperowitz & Co. — Certified Public Accountants