Steinitz backs down on trapped corporate profits

Finance Minister Yuval Steinitz Tuesday announced that he will issue a directive granting tax breaks for billions of shekels in trapped profits of multi-national corporations.

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 blowout.”

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.”