The tax and grant breaks for Israeli industrial companies have just been upgraded, foreign investors and Israeli companies should check out the possibilities.
The tax and grant breaks for Israeli industrial companies have just been upgraded, pursuant to Amendment 68 of the Law for the Encouragement of Capital Investments, 1959. Over the years, this law has been the highly effective in attracting billions of dollars of foreign and Israeli investment into the Israeli private sector. The changes are effective from January 1, 2011. Israeli companies and multinational groups should check out the possibilities.
Objectives of the law
The stated objectives of the Law are: the encouragement of capital investment and economic initiative, with a view to giving priority to innovation and activity in development areas, to develop productive capacity of the national economy; improve the ability of the business sector to compete in international markets; generate the basis for stable new places of work. The absorption of immigration has been dropped as an objective.
New benefit packages for industry
In the past, benefits were granted to Approved Enterprises and Privileged Enterprises, and these remain available under transitional rules (see below).
Commencing January 1, 2011, reduced company tax rates will now be available for ‘‘preferred income‘‘ derived by a ‘‘preferred enterprise‘‘ of a ‘‘preferred company‘‘ as follows:
* Development Area A: 10 percent tax in 2011-2012; 7% tax in 2013-2014; 6% tax in 2015 onward.
* Elsewhere in Israel : 15% tax in 2011-2012; 12.5% tax in 2013-2014; 12% tax in 2015 onward.
These rates are lower than the regular rate of Israeli company tax (24% in 2011).
In the case of a ‘‘special preferred enterprise,‘‘ even lower company tax rates are available in all years from 2011, as follows:
* Development Area A, 5%;
* Elsewhere in Israel, 8%.
The main terms and definitions are discussed below. There is no longer a need to make a minimum investment in fixed assets. No approval is needed, except for a grant package or ‘‘special preferred enterprise‘‘ status.
Accelerated depreciation rates are also available for fixed assets; detailed rules and possibilities exist.
Dividends generally will be taxed at 15%, subject to the provisions of any applicable tax treaty between Israel and a foreign shareholder,s country of residence. No tax will be withheld from dividends paid to another Israeli company.
Main conditions for industrial tax breaks
* Preferred income: This is income from a preferred enterprise, less discounts given, that is accrued or derived in the ordinary course of business in Israel from income from any of the following:
(1) sale of products produced in the enterprise, including components produced in a different enterprise, except components derived from a mine or other enterprise for the production of quarried materials or an enterprise for the exploration or production of oil or gas (this exception recently caused consternation among some Israeli companies);
(2) sale of semiconductors produced in another plant owned by an unrelated party (e.g., in the Far East), based on know how developed in Israel;
(3) grant of a right to use know-how or software developed in the enterprise or royalties received for such use if the Chief Scientist‘s Office confirmed that they are ancillary to the productive activity of the preferred enterprise;
(4) services ancillary to the aforementioned items;
(5) industrial research and development for a foreign resident, if approved by the Chief Scientist‘s Office.
* Preferred enterprise: This is an industrial enterprise whose main activity in the year is industrial activity (excluding mining, quarrying, or oil and gas exploration) or production that is competitive and contributes to Israel‘s gross domestic product.
Competitive means that no more than 75% of total income is from sales on any one market in the year concerned, and at least 25% of total income is from sales to a market with at least 12 million residents. (The term market is intended to refer to jurisdictions, even if they are not universally respected as countries; e.g., Taiwan, Hong Kong.) Alternatively, it is a competitive renewable-energy enterprise.
* Preferred company: This is a company incorporated in Israel that is not 100% state-owned, or a partnership registered under the Partnerships Ordinance, whose partners are all companies incorporated in Israel that are not 100% state-owned, which meet all the following conditions: it owns a ‘‘preferred enterprise‘‘ (see above); its business is controlled and managed in Israel; it is not fiscally transparent or a kibbutz (cooperative agricultural settlement); it keeps proper accounting records as prescribed in the Israeli tax law; it and its office holders were not convicted of a tax offense in the preceding 10 tax years.
* Special preferred enterprise: This enjoys its tax rates for a limited period of 10 tax years commencing in the year chosen by the taxpayer, if all the relevant conditions are met. These conditions include:
(1) total preferred income of the enterprise is at least NIS 1.5 billion ($410 million approx.);
(2) total revenues NIS 15bn. to NIS 20bn. ($4.1bn. to $5.45bn approx.) for the company or the group that consolidates its revenues under generally accepted accounting principles;
(3) the directors-general of the Finance Ministry and the Industry, Trade and Labor Ministry confirm that based on a business plan submitted to them, the enterprise should make a substantial contribution to Israeli economic activity and advance the above macroeconomic objectives, having regard to, among other things, the location and employee salary levels.
The business plan must reflect investment in productive assets of NIS 400m. in development area A, or NIS 800m. in another development area; OR R&D investment of NIS 100m. in development area A, or NIS 150m. in another development area; OR 250 new jobs in development area A, or 500 new jobs in another development area.
The development areas will be determined according to socioeconomic criteria and will be published ‘‘from time to time‘‘ on the Industry, Trade and Labor Ministry‘s website.
Grant packages for industry
The Finance Ministry and the Industry, Trade and Labor Ministry may, subject to Knesset Finance Committee approval, determine new assistance packages for industry that will encourage innovation and efficiency and contribute to the economy, investment and human capital. The packages may include training grants and support for small and medium enterprises by way of loans, etc. These grants may range up to 30% plus a 10% special addition, for a total up to 34%.
The Industry, Trade and Labor Ministry‘s Investment Center may determine fixed asset grants ranging up to 24%, in development area A, only. The recipient enterprises must be competitive and contribute to GDP, as discussed above. (This normally involves 25% exports, except in the case of biotech or nanotech enterprises.)
These rules apply to preferred income accrued or derived by a preferred company from January 1, 2011. Various transitional rules are prescribed. A company that did not elect grants and made the minimum required investment under the old rules in 2010 may elect the old package (e.g., 0% on undistributed income for two to 10 years) by the 2012 tax year.
Alternatively, it may irrevocably be permitted to elect benefits under the latest amendment in certain circumstances.
A minimum waiting period generally applies to elected grants under the old law before they can switch to the new law. The waiting period is five years if the grant program was approved on or after April 1, 2005; three years if approved before then.
In addition, their tax rate (up to 25%) is now capped at the new lower regular company tax rates rates enacted in Israel (24% in 2011). Nevertheless such enterprises have a one-time chance to elect by June 30, 2011, to switch to the benefits under the new law, with effect from the 2011 tax year.
The transitional rules are complex and specialist advice should be obtained sooner rather than later.
Benefits for tourism
The old tax breaks will continue to apply to tourism enterprises if certain conditions are met. The tax breaks apply to ‘‘tourism accommodation installations‘‘; i.e., buildings with at least 11 rooms that provide accommodation services for guests for fixed periods of time, and ancillary services including meals, pleasure and relaxation.
These tax breaks also apply to ‘‘attractions‘‘ i.e., a unique tourism enterprise that provides a leisure, cultural or relaxation activity and represents a focal attraction for tourism.
Tourism enterprises may enjoy company tax rates ranging from 10% to 24% for seven to 10 years. The higher the level of foreign investment, the lower the tax rate: 10% company tax if foreign investment in the company is 90% or more;15% company tax if foreign investment in the company is 74%-89.99%; 20% company tax if foreign investment in the company is 49%– 73.99%; 24% company tax (in 2011) if foreign investment in the company is below 49%. Dividends will be taxable at 15%, subject to any tax treaty.
If no government grants are taken, there is also an option to enjoy zero company tax on undistributed profits.
Some of Israel‘s older tax treaties contain ‘‘tax sparing‘‘ clauses; for example, with the UK, Canada and South Africa. These preserve the Israeli tax breaks for investors from those countries by granting a credit for regular Israeli tax normally payable, rather than the reduced rate actually payable. However, the precise wording of each treaty should be reviewed. There is no tax-sparing clause in the Israel-US tax treaty.
As always, consult experienced tax advisors in each country at an early stage in specific cases.
Leon Harris is a certified public accountant and tax specialist at Harris Consulting & Tax Ltd.