STOTLAND | GLOBAL TP MONITOR A weekly Review of Global Transfer Pricing Developments

Issue No. 06 | October 23, 2026

Israel takes center stage this week with two newly published transfer pricing tax rulings addressing issues frequently encountered by multinational technology groups: the remuneration of substantial R&D centers and the integration of acquired intellectual property into a cost-sharing arrangement.

The common thread is substance. In one ruling, considerable technical capability did not displace a limited-risk characterization; in the other, entry into a cost-sharing arrangement did not, by itself, trigger a taxable business-model change. Both conclusions depend on carefully defined facts and conditions.

I. Case Law / Tax Authority Decisions

1. Israel — Tax Ruling 5007/26: Limited-Risk R&D Center

Jurisdiction: Israel

Authority: Israel Tax Authority

Published: 20 October 2026

Ruling: 5007/26

Topic: R&D services | TNMM | Cost Plus | DEMPE | Risk control

Background

An Israeli subsidiary operated as one of several R&D centers of a multinational group whose annual revenues exceeded USD 10 billion. Its workforce included senior technical and managerial personnel, and its activities extended to the development of core products and particular product components.

The foreign parent nevertheless retained ownership of the relevant intellectual property, strategic decision-making authority, funding responsibility, budget approval and control over the economically significant R&D risks and DEMPE functions.

The taxpayer sought confirmation that the Israeli entity could continue to be remunerated as a limited-risk R&D service provider rather than participate in a residual profit split.

Tax Authority decision

The ITA accepted the limited-risk characterization and the transactional net margin method (TNMM), using mark-up on total costs as the profit level indicator. For the particular facts presented, the ruling adopted a 13% cost-plus mark-up.

The scale of the Israeli workforce, the seniority of its personnel and its contributions to strategically important products were not regarded as sufficient, by themselves, to require a profit-split method.

Why it matters

The ruling offers useful support for the proposition that technical sophistication is not synonymous with entrepreneurial risk-bearing. The decisive inquiry remains who actually directs the relevant development activity, controls significant risks, funds the work and makes strategic IP decisions.

The 13% figure is not a general safe harbour. Groups should substantiate their own margins through functional analysis and benchmarking, while ensuring that intercompany agreements and actual governance support the claimed allocation of DEMPE functions and risks.

For Israeli R&D centers that have expanded in size or assumed more complex technical work, contemporaneous evidence of budget approvals, project governance, risk-control decisions and IP ownership will be particularly important.

Practitioner’s note:

A large engineering team may build the product, but headcount alone does not tell us who is steering the IP ship.

2. Israel — Tax Ruling 7216/26: Post-Acquisition Cost Sharing Arrangement

Jurisdiction: Israel

Authority: Israel Tax Authority

Published: 20 October 2026

Ruling: 7216/26

Topic: Cost sharing | Pre-existing IP | Royalties | Business restructuring | Section 85A

Background

Following the acquisition of an Israeli IP-owning company by a U.S. multinational group, the Israeli company and a U.S. group company entered into a cost-sharing arrangement (CSA). Each participant retained ownership of its pre-existing IP and granted the other rights to use that IP in exchange for royalties reflecting its relative value.

The parties agreed to share future development costs by reference to anticipated benefits from their respective territories. The arrangement was structured with regard to U.S. Section 482 regulations and OECD transfer pricing principles.

Tax Authority decision

The ITA accepted the arrangement as consistent with Section 85A of the Israeli Income Tax Ordinance on the stated facts. Entry into the CSA did not, in itself, constitute a taxable business-model change or a deemed realization of capital gains, subject to the ruling’s conditions and limitations.

Payments for access to pre-existing IP were characterized as royalties, including for Israel–U.S. treaty purposes. By contrast, the future-development cost-sharing payments described in the ruling were not treated as royalties and were not subject to Israeli withholding tax under the approved arrangement.

Why it matters

The ruling draws an important distinction between the transfer of existing IP and participation in a framework for jointly funding future development. A CSA does not automatically establish that an Israeli participant has disposed of its business, functions or intangible assets.

Post-acquisition integration requires particular care in defining existing IP rights, valuing access to those rights, allocating territorial benefits and documenting the participants’ actual functions, risks and expected benefits. Changes to the arrangement—including territorial revisions, IP disposals or new participants—may require renewed analysis or approval.

The result is fact-specific and should not be interpreted as blanket approval for cost-sharing structures or as eliminating the need to analyze a potential taxable restructuring.

Practitioner’s note:

Joining a cost-sharing arrangement is not necessarily the same as packing the IP into a suitcase and sending it abroad.

II. Closing Observation

These rulings reinforce a familiar but consequential transfer pricing principle: legal labels, staffing levels and transaction names cannot substitute for an analysis of what the parties actually own, decide, fund and control. For technology groups, the best defense remains alignment between the contracts, the economic analysis and the day-to-day operating facts.

Source note: Israel Tax Authority tax rulings 5007/26 and 7216/26, reported as published 20 October 2026. The supplied reference links were placeholders and have therefore not been reproduced. Descriptions are based on the supplied ruling summaries; full official texts and any undisclosed conditions should be checked before reliance.