HP Negotiating Registration of Intellectual Property in Israel

HP Inc. is in negotiations with the Israeli government and the Israeli tax authority on the terms to be applied to the registration of the intellectual property in the country, according to people familiar with the matter who spoke on conditions of anonymity.

Intellectual property is typically listed where a company is founded and where the center of its business is located. In the era of multinational market leaders, this has become more difficult to determine. In many cases, companies bought by other companies lose their intellectual property rights, which are transferred to another country offering better tax plans.

In an attempt to push back against tax havens, in 2015, the G20 forum and the OECD retracted a policy that allowed companies to avoid taxation by registering in countries that offered better rates. Following the new guidance, many multinational companies are now replanning their intellectual property registration strategy.

By transferring intellectual property out of Israel to locations with lower tax rates multinational corporations can pay fewer taxes on Israeli companies, and are subject only to a one-time tax payment for the acquisition of the intellectual property.

Israel stands to benefit from the registration of intellectual property in the country as it often comes hand-in-hand with increased research and development activity.

Attempting to lure multinational firms, the Israeli Ministry of Finance enacted sweeping tax benefits for multinational tech companies, offering them a corporate tax rate of 6%, compared with a 24% tax levied on other companies, and a dividends tax of 4%, compared to 20%.

The intellectual property currently being discussed is related to research carried out by Israel-based digital printing company HP Indigo.

Hewlett-Packard (HP) bought Indigo in 2001 for $830 million, later rebranding it as HP Indigo, currently a part of global HP Inc.

If HP agrees to register Indigo’s intellectual property in Israel, the company stands to pay reduced fees of 6% corporate tax and 4% capital gains tax on intellectual property-related income. Additionally, the Israeli government will guarantee HP Indigo a stable tax rate for the next ten years. The value of HP Indigo’s intellectual property is estimated at over $500 million.

In August, Calcalist reported that Israeli court slapped Hewlett Packard Enterprise (HPE), another spin-off of HP, with a $450 million (1.6 billion shekels) tax bill. The bill concerns the 2006 acquisition of Israeli software company Mercury Interactive by HP for $4.5 billion in cash. Following the acquisition, Mercury became the core of HP’s software division, which was later spun off as HPE. After the deal was finalized, Mercury’s intellectual property was transferred to HP.

While at first, HP paid taxes in Israel for capital gains made on the deal, the Israeli tax authority put forward a demand that the company pays an Israeli corporate tax as well, after to Mercury’s intellectual property was transferred overseas.