The Encouragement of Capital Investments Law in Israel provides significant tax benefits, inter alia, to investors who are non – Israeli residents, such as low tax rates on dividends, reduced corporate tax rates, accelerated depreciation and more.
The purpose of the law
The purposes of enacting the Encouragement of Capital Investments Law in Israel (hereinafter- The Law) are, inter alia, to encourage economic initiative, investment of local and foreign capital for the purpose of developing the productive capacity of Israel’s economy, efficient utilization of its resources, economic potential and full utilization of the production capacity of existing enterprises;
According to the Law, in order to fulfill its purposes the Law grants, inter alia tax benefits, exemptions and grants.
Conditions of entitlement
Tax benefits under the Law are subject to compliance with certain conditions and engaging designated income producing activities as follows:
- Income derived from a tourist accommodation facility or tourist attraction.
- Income from an industrial enterprise through manufacturing activities.
- Income from R&D in Israel
The above is subject to additional terms. One of the main conditions is that the income derives from more than one country / customs territory, or that at least 25% of the income is derived from export activity.
In this newsletter we will review the tax benefits for income derived from manufacturing activities and fromR&D.
The following are main conditions, inter alia, for entitlement to tax benefits granted by the Law:
- The income must be from a company incorporated in Israel or a partnership in which the partners are companies incorporated in Israel,
- The company or companies must own an industrial factory in Israel whose main activity is manufacturing
and/or – the company’s income is derived from R&D (subject to additional conditions).
The following table summarizes the main tax benefits for industrial companies and companies engaging in R&D, subject to fulfillment of all conditions specified in the Law.
|Industrial companies||R&D companies|
|Dividend tax rates||20%
Dividend distributed to a non Israeli company – 4%
|Reduced corporate tax rate||7.5%-16%||7.5-%-12%|
|Reduced capital gains tax rate||6%-12%
Under certain conditions
|Depreciation rate||Accelerated depreciation for productive assets:
200% for machinery / equipment
400% for buildings (up to 20% per year)
There are further tax benefits for “special” industrial and R&D companies that have turnover estimated in billions. These additional tax benefits have to be approved by the Israeli Tax Authorities.
Tax benefits for non- Israeli resident companies
Tax benefits for non-Israeli companies exist on all the types of income described above, but especially apply toR&D companies.
In order to encourage the development of intangible assets in high-tech companies, the Law grants tax benefits with regard to income derived from intangible assets (such as software, patents and other rights of a technological enterprise), owned by a company. Such an income is taxed at reduced rates.
According to the Law, dividends distributed from such a company to a non-Israeli company are taxed at only 4%, subject to the fulfillment of the following conditions:
- At least 90% of the shares must be held by non Israeli companies
- Profits must continue generating after the share purchase date.
The tax rate on a capital gain tax, resulting from the sale of an intangible asset to a related non Israeli resident company will be12%, if the asset was purchased from a non Israeli resident company for at least NIS 200 million. The rate will reduce to 6% if the factory was the first party to own the intangible asset or if it was purchased from a non- Israeli company.