Income Tax Circular 08/2026 on Marketing Intangibles

On August 4, 2026, the Israel Tax Authority published Income Tax Circular 08/2026 on marketing intangibles. The purpose of the circular is to establish criteria that will assist in determining when a marketing intangible exists, the amount of income that should be attributed to it, and the internal review mechanism that will apply before an assessment is issued on this matter.

The circular is based on Amendment 73 to the Encouragement of Capital Investments Law, which adopted the principles of Action 5 of the Organization for Economic Co-operation and Development (OECD) and provides that income from a marketing intangible is not included in the definition of “technological income” eligible for tax benefits. In practice, the circular seeks to reduce the uncertainty surrounding the question of when a brand, customer relationships, trade name or similar assets justify a separate attribution of income.

The circular’s main contribution is in three areas. First, it clarifies the starting point that not every activity with a marketing element justifies attributing income to a marketing intangible. Second, it refers to the 10% rule, under which, if the income attributed to the marketing intangible does not exceed 10% of the technological income attributed to the preferred intangible asset, there is no need to attribute separate income to the marketing intangible. Third, it establishes an internal approval mechanism within the Israel Tax Authority before an assessment is issued on this issue, which may affect the way discussions with the assessing officer are conducted.

Normative Framework

The circular is based on the distinction under the Encouragement of Capital Investments Law between a “preferred intangible asset” and a marketing intangible. According to the circular, and in line with OECD principles, intellectual property derived from marketing, such as a trademark, is not eligible for the tax benefits granted to technological income, whereas a patent, software or other innovative intellectual property may qualify for benefits, subject to the conditions of the law. The circular further provides that income should be attributed to the marketing intangible in accordance with the transfer pricing principles set out in Section 85A of the Income Tax Ordinance and the OECD Guidelines, with the necessary adjustments.

The 10% Rule and Its Practical Significance

One of the important sections of the circular is its reference to Regulation 6(c)(2). Under this provision, if the income attributed to the marketing intangible does not exceed 10% of the total technological income attributed to the preferred intangible asset, no separate income will be attributed to the marketing intangible, and all of the income will be classified as technological income. The circular also provides an example of a company that derives income from granting the right to use software, where the portion of income that can be attributed to a marketing intangible is below this threshold. In such a case, all of the income will be attributed to the software and will benefit from the tax incentives.

The circular also clarifies an interpretive point from Circular 9/2017: the percentage of income attributed to a marketing intangible is examined out of the company’s technological income, and not out of its taxable income. This is an important clarification, because it directly affects the measurement base and the amount of income that may be excluded from the benefits track.

Criteria Supporting the Absence of Income from a Marketing Intangible

The circular presents a series of indications that there is no basis for attributing income to a marketing intangible or, alternatively, that the marketing intangible is not material to an extent exceeding the 10% threshold. These include, among others, business-to-business (B2B) sales or government-to-business (G2B) sales, situations where the decision to purchase is based on technical specifications or regulatory requirements, and cases where the product sold is a component within a final product and loses its independent identity.

Another indication is a situation in which the company develops a preferred intangible asset and grants another company the right to use it for long-term marketing of the product, so that its income is derived from royalties. In such a case, the tendency will be not to attribute the income to a marketing intangible. The absence of significant competition due to the uniqueness of the product may also support the conclusion that the contribution of a marketing intangible is marginal.

At the same time, the circular cautions that low marketing expenses relative to research and development (R&D) expenses are not conclusive evidence of the absence of a marketing intangible, and that each case will be examined based on its specific circumstances. The criteria are not a closed list, and the assessing officer may determine that a marketing intangible exists even if some of the above indicators are present, subject to the internal approval mechanism.

Borderline Cases and Remaining Uncertainties

The circular itself acknowledges that, as of its publication date, the Base Erosion and Profit Shifting (BEPS) rules do not include explicit provisions regarding the scope of a marketing intangible or the manner of calculating the income that should be attributed to it, and that no clear practical examples have been provided on this issue. Therefore, even after the publication of the circular, broad discretion remains on questions such as the distinction between technological value and marketing value in a successful software product, the method of quantifying the contribution of customer relationships, and the weight to be given to the group’s contractual structure.

In addition, the circular does not offer a detailed numerical methodology for attributing income. Instead, it refers to transfer pricing principles. This means that in complex cases, evidentiary and economic disputes will continue to arise, even if the framework for the discussion is now clearer.

Practical Implications

The circular is relevant mainly to technology companies that benefit from, or seek to benefit from, incentives under Chapter B3 of the Encouragement of Capital Investments Law, particularly where they hold assets such as brands, logos, trademarks, customer relationships or significant marketing platforms. In practice, such companies should examine, already at the stage of preparing their tax return, whether there is a basis to argue that no material marketing intangible exists. This position should be supported by the nature of the customers, the characteristics of the product, the manner of engagement and the revenue structure.

Attention should also be given to the fact that the internal approval mechanism will also apply to assessments where discussions began before the publication of the circular, as long as no order was issued before its publication. In addition, the circular expressly states that the Professional Division may be approached in the framework of an advance tax ruling request, in order to obtain approval regarding the existence or absence of a marketing intangible, the rate of income to be attributed to it, and the attribution method. In sensitive cases, this is a tool worth considering in advance.

Our View

In our view, Income Tax Circular 08/2026 is a welcome attempt to regulate an area that has been subject to interpretive uncertainty. However, it does not provide a complete response to the key difficulties that arise in applying the rules in practice. The circular clarifies the position that not every commercial element justifies attributing income to a marketing intangible, and it establishes an internal review mechanism before an assessment is issued. On the other hand, it leaves significant questions open regarding the method of quantification and the separation between technological value and marketing value.

The main difficulty is that the circular relies on indications and general principles, but does not establish a clear, consistent and practical methodology for attributing income to a marketing intangible. In the absence of a formula, comparative examples or operational benchmarks, broad discretion remains for both the assessing officer and the taxpayer. This may lead to inconsistency and impair companies’ ability to plan their reporting and exposure with a sufficient degree of certainty.

In addition, the circular does not fully resolve the tension between the Encouragement of Capital Investments Law and transfer pricing principles. The reference to Section 85A of the Income Tax Ordinance and the OECD Guidelines is understandable from a theoretical perspective, but it does not necessarily provide a simple practical solution in cases where the contributions of the brand, customer relationships and technology are intertwined. It is precisely in these cases that more detailed guidance is required, and the circular does not provide it to a sufficient extent.

To the circular’s credit, the internal approval mechanism before an assessment is issued may help reduce aggressive positions and contribute to a certain degree of consistency. However, an internal review mechanism is not a substitute for more complete normative clarification. Ultimately, the circular improves the framework for discussion and provides certain interpretive tools, but it does not eliminate the underlying uncertainty. Therefore, in complex cases, a specific factual and economic analysis will still be required, and in some cases an advance tax ruling should also be considered.

Can Certainty Be Obtained in Advance?

Yes. The circular states that an application may be submitted for an advance tax ruling regarding the very existence of a marketing intangible, the rate of income to be attributed to it, and the attribution method. In complex cases, this may be an effective way to reduce disputes.

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