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The law for the encouragement of capital investment in Israel31/05/2005. Source: Israel Venture Capital Journal.
 In this IVCJ article, Ruchama Salman, CPA and specialist in Israel's incentive laws for industry, and Shmuel Barashi, CPA at the accounting/consultancy firm BDO-Ziv-Haft, describe the Law for the Encouragement of Capital Investment in Israel and the issues being considered as Israel moves to update the law.
The "Law for the Encouragement of Capital Investment in Israel", in place for the past few decades, is aimed at attracting foreign and domestic capital and promoting business initiatives.
The Law applies to enterprises from all industrial sectors - textiles, food, electronics, chemicals, pharmaceuticals, computer software, biotechnology and more - as well as hotels, tourism ventures and industrial and residential construction.
Based on Israel's research and development potential and a desire to preserve its professional and advanced labor force within its borders, the Law also applies to industrial development centers - which may avail themselves of full benefits under the Law, although they may not strictly fulfill the generally accepted definition of "industry".
Under the Law, the country is geographically divided into three National Preference Zones: A, B, and C. The most preferential benefits accrue to businesses located in Zone A - areas far from central Israel that are relatively weak economically. The Law allows a business enterprise to choose the type of its benefit from two alternatives: Grants plus tax benefits.
The State shares the risk in executing an investment program by providing a grant to the enterprise during the period when it is established or in its expansion stage. The State also provides tax benefits on income earned by the enterprise. Today, the grant amount for preferential zones is 24 percent of the investment. Grants, however, are not available to Zone C (central Israel) businesses for which only tax benefits are available. Tax benefits. The State supplies "increased" tax benefits on income generated from establishment and/or expansion of an enterprise.
Currently, the benefit in preferential areas is full exemption from taxes on income, provided that the income is retained in the enterprise and is used for its operations or continued expansion. Foreign resident investors are given tax benefits for extended periods (up to 10 years for approved investment programs, and up to 15 years for certain large programs). The goals set by the Law several decades ago still apply today, but are being updated in light of technological and economic developments to enable Israel to compete with other countries that provide incentives to investors. While legislative amendments to the Law can be time consuming, the Law is sufficiently dynamic and flexible in its application.
The Israeli government is presently preparing amendments to the Law that would simplify the process of approving and tracking investment programs, overcome existing distortions and entice investors to establish operations in Israel. The Government seeks to determine a "strategic route" for multinational companies that would provide expanded investor benefits and leave the zero percent tax rate even where income is not retained in the enterprise.
Considerable discussion is taking place regarding the type and extent of benefits that should be made available. There are several view-points among the interested parties.
Issues/questions that are currently dominating the debate include the following:
Should special assistance be granted to enterprises whose sole contribution to the national picture is providing employment opportunities in peripheral areas? If so, should such purpose be reflected in the framework of the Law or in separate legislation? Currently, the number of workers to be employed and the location of an enterprise are given significant weight by decision-makers in application of the Law.
While Israel is part of a single global village, it is relatively small physically. Is it meaningful to divide the country into preferential and less-preferred zones?
Which governmental body should be entrusted with application of tax benefits? Is it the Ministry of Industry and Trade, which is charged with advancing Israeli industry or the tax authorities? Currently, the Law's tax benefits are administered by the Ministry of Industry and Trade, with participation of the tax authorities.
Several high-profile multinational firms have made investments in Israel. Among the more prominent companies are Intel, which has been operating here for several decades; Vishay, which has facilities in several Israeli locations; and Hewlett-Packard, which recently established its first Israeli enterprise.
We would emphasize that although Israel is known for its high-quality labor force and the superiority of its research and development, the government places considerable importance on the establishment of new enterprises within its borders and cooperation with enterprises/initiatives throughout the world. We would expect any revisions to the Law to fully promote these objectives.
This article first appeared in the Israel Venture Capital & Private Equity Journal. IVC Research Center publishes the Israel Venture Capital & Private Equity Journal (IVCJ), a quarterly review of trends and developments in the Israeli-related venture capital industry. IVCJ, distributed worldwide, is dedicated to provide wide-range coverage of Israel's venture capital industry. For more information please visit http://www.ivc-online.com
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