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Main | Investments | 6/24/2015

Investment incentives in the Law for the Encouragement of Capital Investment

Investment incentives are outlined in the Law for the Encouragement of Capital Investment which was recently revised. The new Law differs from the previous one in that it adds a new path for incentives – an Automatic Tax Programs.
Information is courtesy of the Ministry of Industry Trade and Labor (www.moital.gov.il)

Investment incentives are outlined in the Law for the Encouragement of Capital Investment which was recently revised. The new Law differs from the previous one in that it adds a new path for incentives – an Automatic Tax Programs
  
The incentive programs can be divided into 2 main types: 

  1. The Grants program - administered by the Israel Investment Center (IIC), a department of the Ministry of Industry, Trade and Labor 
  2. The Automatic Tax Benefits program- administered by the Tax Authorities. 

To qualify, investment projects must meet certain criteria including: international competitiveness ( as describe in the low( section 18 1©a)), minimal designated investment, high added value and registration of the company in Israel. 
  
Once these criteria are met the enterprise gains Approved Enterprise status from the IIC if it chooses the grants program andBeneficiary Enterprise status by the Tax Authority if it chooses one of the tax benefits programs. It is then eligible for incentives, such as grants of up to 24% of tangible fixed assets (grants program only) and/or reduced tax rates, tax exemptions and other tax related benefits.
  Location 
  
The government grants scheme is affected in part by the location of the company's activities. Several regions in Israel have been declared National Priority Regions: 
  
Priority Area A includes:

  •  The Galilee
  • Jordan Valley
  • The Negev
  • Jerusalem (for hi-tech enterprises)


  
Priority Area B includes:

  • Lower Galilee
  • Northern Negev


Area C includes the rest of the country. 
  Grant Program 
The amount of the government grant is calculated as a percentage of the original cost of land development and investment in buildings (except in Area C), in machinery and equipment. This cost includes installation and related expenses. The percentages are:   
  
Table 1
 


 
Priority Area A* Priority Area B
Industrial projects** 
Up to NIS 50 million

24%

10%
Industrial projects 
Above NIS 50 million

20%

10%

Investment in hotels and other accommodations

24%

 

Other tourist enterprises

15%

 


* Plus an additional grant of up to 8% for companies locating in the south ("Negev area")  
** or located in low socioeconomic town ( 6 or less) 
  Time to Completion 
Under the provisions of the grants scheme, 20 percent of the approved program for industrial projects should be completed within 24 months from the date of approval. The investment program should be completed within 5 years from the date of approval. 
  Tax Benefits 
  
a) Grant Program
Companies choosing the grant program receive tax benefits as well for a period of  7 consecutive years, starting with the first year in which the company earns taxable income (grants are not considered income). Tax benefits are determined by the percentage of foreign control: the more foreign control in the enterprise, the higher the benefits. If at least 25% of an Approved Enterprise's owners are foreign investors, the enterprise is eligible for a 10 year period of tax benefits*. See table below (all figures are in %)
Table 2
 


 

Company owned by Foreign Investors

Company that is not an Approved Enterprise

 

Tax rates by ownership stake (in %)

 

 

90 to100

74 to90

49 to 74

Less than 49

 

Taxable Income

100

100

100

100

100

Company Tax

10

15

20

25

34

Balance

90

85

80

75

66

Dividend  tax: 15% of balance

13.5

12.75

12

11.25

25

Total tax on distributed income

23.5

27.75

32

36.25

50.5


b) Automatic Tax Programs
 
There are 3 types of automatic tax programs:

  1. Alternative tax program
  2. Priority area program
  3. Strategic program

The minimal designated investment in programs 1 and 2  are:
 
A. Greenfield (new) investment- at least 300,000 NIS as in the table below:
B. Expansion- at least 300'000 NIS or amount equal to the "Approved rate" from the productive assets (the higher) from the following:
 


Value of productive assets (mil NIS)

Required investment as % of  the productive assets

Up 140

12%

140-500

7%

500+

5%
  1. Alternative tax program:  A company can choose this program by waiving the project's rights to a grant and will receivecomplete exemption from corporate tax on its undistributed income, as detailed below.    
    Table 3
     

Priority Area A:

Priority Area B:

Area C / Central Israel:

10 years of complete tax exemption

6 years of complete tax exemption and 1 year of tax benefits, 4 years for a foreign investor*

2 years of complete tax exemption and 5 years of tax benefits, 8 years for a             foreign investor*


As in table 2
 
 2.   Priority area program:  For companies investing in Priority Area A, benefits include: 
a. Corporate tax rate of 11.5% 
b. Dividend tax rate of 15%, total tax rate of 24.5% 
    For a foreign investor, the dividend tax rate is 4% and a total tax rate of 15%
The benefit period is for 7 years. If at least 25% of the company is foreign owned then the benefit period is 10 years


3. Strategic program:  This program is intended mainly for large multi-national companies meeting the following criteria: an annual turnover of at least $3 billion and a minimum investment of $130 million in the project itself. Location: according to table 4 
   
  
 Table  4


Total group revenue

Minimal designated investment

Priority Area

Ministers decision

By law

Ministers decision

By law

 

 

13 billion NIS

 

600  mil NIS

Acknowledged area*

13 billion NIS

20 billion NIS

600 mil NIS

900 mil NIS

Area A

20 billion NIS

 

900 mil NIS

 

Area B or other


  
Benefits include: 

a.   Corporate tax – 0% (i.e. complete tax exemption) 
b.       Dividend tax – 0% 
c.       Benefit period – 10 years 
  
  
* Accre (Akko)/Carmiel - northwards 
  
   Be'er Sheba / Arad -  southwards

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