Your Taxes: Privileged-enterprise tax breaks for renewable-energy projects

September 8, 2009 10:25
2 minute read.
Electric-power generating units at a hybrid solar-

Electric-power generating units at a hybrid solar-. (photo credit: LEON HARRIS )

Israel has always had a penchant for renewable energy. For example, building regulations require solar water heaters to be installed in new projects.

The Economic Efficiency Law enacted on July 14 extends tax breaks for "privileged enterprises" to renewable-energy businesses.

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Privileged Enterprise tax breaks

Here is a quick recap of the Privileged Enterprise tax regime.

• They are in the industrial, technology or tourism sectors.

• Undistributed profits are exempt for two to 15 years, depending on the location and foreign ownership. This suits investors hoping to enjoy capital gains from an exit rather than dividends.

• Low company tax rates of 10 percent to 25% apply to distributed and subsequent profits.

• Dividends are taxed at a rate of 4% or 15%, depending on the package selected.

• Consequently, combined Israeli taxes on distributed profits of a Privileged Enterprise may range from 0% to 36.25%.

• An Approved Enterprise in a development area will enjoy the same low taxes but no exemption. Instead it may receive fixed-asset grants of 20%-32%.

How does a company qualify for the preferential tax regime?

This is possible if certain conditions are met, without needing to obtain approval. The main conditions include:

• The company has an "industrial enterprise" or a tourism enterprise. If industrial, the main activity in the tax year is productive; this may include software products and industrial research and development for a foreign resident approved by the Chief Scientist's Office.

• A "minimum qualifying investment" must be made in fixed assets in industry (or a tourism enterprise) in Israel (only NIS 300,000 over three years for new start ups). For existing companies, the new investment must also exceed 5%-12% of the tax-depreciated value of fixed assets other than buildings at the end of the preceding tax year.

• Privileged Enterprises and Approved Enterprises must be competitive and contribute to gross domestic product (GDP). In practice, this translates into a 25% export requirement in all industries except biotechnology and nanotechnology.

Renewable-energy projects

This amendment refers to an enterprise that is primarily active in research and development in renewable energy (derived from solar radiation, wind, biomass or other sources but not fossil fuel) or the production of plants in this field. This does not include the sale of electricity based on renewable energy.

The activity must be based on new knowhow that the Industry, Trade and Labor Ministry's chief scientist has confirmed as being suitable for research and development. This can be done not only at the R&D stage but also at the productive stage.

Such a renewable-energy enterprise is considered to be a competitive enterprise that contributes to GDP without regard to exports (such as biotech and nano-tech enterprises), making it eligible for privileged-enterprise tax breaks.

In addition, a subcontractor that sells components used in a renewable-energy enterprise will be considered a privileged enterprise if

• 25% or more of overall revenues in the tax year are from sales to an enterprise primarily active in renewable energy or sales relating to the construction of a plant based on renewable energy;

• 15% or more of overall revenues in the tax year are to a renewable-energy enterprise in Israel, plus 10% of overall revenues are direct exports to customers in a market with a population of at least 12 million.

These new provisions will add fiscal motivation to ecological necessity.

As always, consult experienced tax advisers in each country at an early stage in specific cases.

[email protected]

Leon Harris is an international tax specialist.

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