Finance Minister Yuval Steinitz Tuesday announced that he will issue a
directive granting tax breaks for billions of shekels in trapped profits of
Companies will pay a rate of 10-25 percent
on the profits, rather than the 15-30% they would pay were they to transfer the
profits outside of the country.
Trapped profits are tax-exempt profits
made in Israel, until the money is transferred abroad. The assumption is that
the capital will be invested in Israeli operations. The directive states that
companies which received a tax exemption under the old Law for the Encouragement
of Capital Investment will pay taxes on these profits.
The tax exemption
under the old law was applicable only if the company did not distribute the
profits as dividends. If it did so, it would be liable to the company tax rate
of 10-25% and the 15% dividend tax, as well. Due to the high tax rate, companies
avoided distributing dividends, and accumulated huge profits. The tax code was
undesirable economically, as tax revenues on these profits were deferred for
years and lost value.
To encourage companies to pay taxes on the
tax-exempt profits, Steinitz decided to give them an incentive through the
directive, which frees the trapped profits. The result is that companies will
return the company tax on which they were exempt.
In 2010, Steinitz
established an inter-ministerial committee to review the Law for the
Encouragement of Capital Investment. The committee recommended reducing the tax
break for wholly-owned government companies and mining and quarrying companies,
and eliminating the companies tax exemption, by setting a lower uniform tax rate
on a company’s total income.
The law enacted on the basis of the
recommendations slashed the tax break for all companies. However, the law was
not retroactive and did not apply to tax breaks to which companies were eligible
under the old law.
Steinitz said, “The issue of trapped tax-exempt
profits was a holdover from the past and is not relevant under the new law. We
believe that this measure is better for both Israel’s citizens and for companies
than not applying it because the success of this measure lifts uncertainty at
the company level on one hand, and will generate larger tax revenues than
keeping the current situation intact.”
Meretz Chairwoman MK Zehava Gal-On
said in response, “Steinitz’s trick serves the tycoons and will cost the
country’s citizens billions. This is a disaster which raises heavy suspicions
about extraneous considerations. This is a scandalous deal that is
unprecedented, was made in the dark, and gives a NIS 20 billion prize to giant
companies so that the finance minister can close the budget
Gal-On added, “The finance minister has finally proved that he
serves the tycoons in Israel to the point that he is prepared to conceal
information from the public and change the rules of the game for these companies
after the game is over.
Steinitz is granting a retroactive discount on
the companies tax and exemption on the capital gains tax for a tiny number of
companies, which hold NIS 100b. in trapped profits in Israel.”