Dr. Avi Nov, Adv.
April 2008
The Israeli Tax Authority published its position regarding the classification of transactions involving computer programs in a special Circular (hereinafter: the Circular). In general, the Circular differentiates between:
· income from a transaction that is classified as a transfer of a copyright right in the computer program, in which some or all of the copyright rights were transferred, or
· a transfer of a copy of the computer program (a “copyrighted article”), which is defined as any transaction in a computer program whose contents are copyrighted .
According to the Circular, a transaction in a computer program that is classified as a transfer of a copyright right that satisfies the conditions set forth in of the Circular will be classified as a sale of the copyright right.
In the case of transactions in copyrighted articles, a transaction in a computer program that is classified as a transfer of a copyrighted article that satisfies the conditions set forth in the Circular will be classified as a sale of the copyrighted article.
The Circular lists indicators for determining whether the transaction should be classified as a sale:
· The purchaser purchases the computer program for personal use or marketing of the product;
· Use of the computer program is for an unlimited period or is limited to the life of the product;
· Payment is not influenced by the length of the usage period of the computer program, or by the amount of its use;
· The purchaser does not commit to returning or destroying the computer program and the computer program does not become unusable at the end of a certain period;
· The computer program can be utilized by the client without being customized; and
The Circular provides that all other proceeds from transactions that involve the transfer of rights in a copyrighted article are classified by the Circular as royalties. It should be noted that the Israeli Tax Authority does not state its position in the Circular on the status of a computer program – whether it should be classified as tangible or intangible property.
Dr. Avi Nov Law Offices, Israeli & international tax law
*This article is intended for informative purposes only and is in no way to be construed as tax advice or a legal opinion
