Tax benefits for preferred technological plants

The “Preferred Technological Enterprise”

On December 29, 2016, the Knesset (The Israeli Parliment) passed the Economic Efficiency Law. The law is a key tool in encouraging capital investment in Israel, in order to increase competition in the economy and increase employment, with an emphasis on innovation and intensification of activity in development areas. This law was enacted with the understanding that the high-tech industry is one of the most important growth engines in the State of Israel, mainly due to the human capital existing in the country. Among other things, the Amendment included 73 new routes for tax benefits to which entities defined as a “Preferred Technological Enterprises” and “Special Preferred Technological Enterprises” are entitled.

What is a “Preferred Technological Enterprise” and a “Special Preferred Technological enterprise?

According to the definition provided by the law, a Preferred Technological Enterprise is an enterprise for which, in any tax year, all the conditions stipulated in the following paragraphs are met:

1. The research and development expenses of the enterprise were at least 7% of the total income of the company owning the plant during the three years preceding the tax years, or exceeded NIS 75 million per year.

2. In a company having an activity, one or more of the following took place:

  • 20%  or more of its employees are employees whose full time salaries have been paid and recorded in their financial statements as research and development expenses or that employ at least 200 such employees.
  • A venture capital fund invested at least NIS 8 million in the company, and the company did not change its type of ​​business after such investment date.
  • Its revenues in the three years preceding the current tax year increased on average by 25%, or more, compared to the previous tax year – provided that the turnover of the Company’s transactions in the current tax year and in each of the preceding three years was NIS 10 million or more.
  • The number of employees in the three years preceding the current tax year increased by 25% or more on average compared to the previous tax year, provided that in the current tax year and in each of the three preceding years the company employed at least 50 employees.

3. The Company received approval from the National Authority for Technological Innovation (the Chief Scientist), according to the conditions that were determined, attesting to its being an enterprise that promotes innovation.

4. Total income in the tax year of the Group in which the company owning the plant is less than NIS 10 billion.

5. The enterprise is a competitive enterprise in accordance with the provisions of section 18A (c) (1) or (2) of the Law.

On the other hand, the definition of a “Special Preferred Technological Enterprise” satisfies all of the conditions relating to the Preferred Technological Enterprise listed above, with the exception of paragraph 4.  In this instance the total income in the tax year of the group for which the company is the owner is NIS 10 billion or more.

What are the benefits to which the enterprises that meet these definitions are entitled?

For your convenience, we have compiled the information for you in the following table:

For more information and to expand on this topic:

Income Tax Circular 09/2017 – The Tax Authority Amendment 73 to the Encouragement of Capital Investments Law.

It should be emphasized that this publication does not constitute a substitute for professional advice.

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