How to obtain certainty with the Israel Tax Authority regarding Technological Income and a Preferred Intangible Asset
More and more Israeli companies are built on software, algorithms, data, and digital business models. At the same time, the need for tax certainty and precise documentation is growing. This is driven by audits, investors, and complex operating structures (for example, an Israeli company within a multinational group).
In this context, Form 975 is designed to help a company obtain an approval from the Israel Tax Authority (ITA) under the green track regarding the classification of the enterprise and the income under the Law for the Encouragement of Capital Investments.
What is Form 975
Form 975 is an application to the Israel Tax Authority with the aim of obtaining confirmation that the company meets relevant definitions under the Law for the Encouragement of Capital Investments (Israel), such as:
- An industrial enterprise.
- A Preferred Technological Enterprise or a Special Preferred Technological Enterprise.
- Technological Income generated by the company.
- And software/intellectual property that meets the definition of a “Preferred Intangible Asset”.
The approval is intended to align the business and technological facts with the legal definitions, and to reduce future disputes with the Israel Tax Authority (subject to the facts presented being correct and maintained over time).
What the ITA actually reviews as part of Form 975
Under the green track, the emphasis is usually on the company’s ability to present a consistent, well-documented factual picture. Among other things, the following are reviewed:
Is the activity truly technological-industrial rather than primarily service-based?
In software companies, it is common for there to be a mix between a product (software) and services (implementation, customization, consulting, support). The Israel Tax Authority may examine:
- What the product is and what is actually delivered to the customer (license/access/services)
- What generates the main economic value
- Whether pricing/agreements/invoices reflect the operating model
Does the IP belong to the applicant company, and is there a clean chain of title?
This is often one of the most critical parts:
- Employment/contractor agreements that include IP assignment provisions to the company
- Development activity in Israel (or allocation of roles between Israel and abroad)
- Use of third-party components and open source code – and whether license compliance is maintained
Are the revenues properly supported, with the ability to segment and explain them?
A claim for “Technological Income” typically requires a clear link between the income and the intangible asset/product. Therefore, it is important to prepare:
- A mapping of revenue types (subscriptions, licensing, royalties, ancillary services)
- Internal principles for allocation if there are mixed revenues
- Consistency with the financial statements and the agreements
And what about multinational groups?
When the Israeli company is part of a group, recurring questions include:
- Who owns the IP – the Israeli company or a foreign parent company
- Whether the Israeli company is only a “development center” or also holds IP and generates revenues
- Whether the intra-group agreements (including Transfer Pricing (TP)) align with the positions taken in the form
Key risks to be aware of
Tax risk: inaccurate income classification
If income classified as technological is viewed in practice as service-based, a dispute may arise in the tax assessment process, and sometimes there may be a need for supplements/corrections.
Civil-contractual risk: IP not properly documented
Gaps in employment agreements or IP assignment can affect not only tax, but also intellectual property, investments, and M&A.
Evidentiary-reporting risk: inconsistent documentation
Different descriptions across investor presentations, the company’s website, agreements, financial statements, and the application to the Israel Tax Authority may raise questions and delay the process.
Practical steps before submitting Form 975
- Mapping activity and revenues: what exactly the product is, what the revenue sources are, and where ancillary services come into play.
- Organizing the IP file: agreements with employees and subcontractors, ownership records, and a focused review of open source use.
- Mapping the group structure (if relevant): who the foreign parties are, what each company’s roles are, and what is stated in the intra-group agreements.
- Consistent narrative: prepare a consistent, documented description of the activity that ties into the legal and accounting materials.
In summary, Form 975 is not a “technical form” but rather a process based on facts, documentation, and a proper presentation of the business and technological model. Early preparation – especially around IP and revenue segmentation – can save time, reduce uncertainty, and decrease friction with the Israel Tax Authority.
How can we help?
Nimrod Yaron & Co. specializes in Israeli and international taxation. Our team includes professionals with years of experience at the Israel Tax Authority, alongside experience at leading firms and law offices, and brings a combination of legal and economic perspective. We advise private and public companies, Israeli and foreign, global venture capital funds, as well as clients seeking focused advice in plain, accessible language. We also work with a professional network of accounting and law firms around the world to provide a full solution in cross-border cases.
If you are considering submitting Form 975, we can assist with eligibility assessment, closing gaps (IP, agreements, revenue segmentation), and preparing an organized application and managing the process with the Israel Tax Authority – in a way that reduces risk and increases certainty.
FAQ
What is Form 975?
A green track application for approval of the classification of an enterprise/income/IP under the Law for the Encouragement of Capital Investments (Israel).
Can any software company submit it?
Not necessarily. It depends on the facts, the revenue model, and IP ownership.
Does the approval guarantee tax benefits?
The approval supports the position, but it is subject to the facts, the wording of the approval, and reviews by the Israel Tax Authority.
What is the most important thing to prepare before filing?
A consistent activity description, an organized IP file, and materials that explain and segment the revenues.
Can a company in a multinational group submit?
Yes, but it is important to align IP ownership and the intra-group agreements.
