Ariav pushes tax exemptions for foreign investors

The Ariav Committee, headed by the Finance Ministry director-general, has in recent months been faced with much skepticism.

Ariav 224.88 (photo credit: Ariel Jerozolimski [file])
Ariav 224.88
(photo credit: Ariel Jerozolimski [file])
The Ariav Committee for capital-market reform is seeking across-the-board tax exemptions for new immigrants, returning Israelis and foreign investors to create a financial center with a competitive tax structure for finance professionals and to be a catalyst for the export of financial services. "The main issue for creating a finance industry in Israel is that today, foreign investors or private equity firms who want to manage funds and foreign money in Israel will be taxed on capital gains except for direct investments into local companies and venture-capital technology-based investments," said Yitz Raab, the chief financial officer of KCPS & Company, an investment-management and private-equity firm with offices in Tel Aviv and New York that is acting as an adviser to the Ariav Committee. "To create a local private-equity industry attracting global fund managers and foreign investors, we recommend to the committee to adopt a capital-gains tax exemption for private-equity investments and hedge funds similar to the US model for non-US citizens," he said in an interview with The Jerusalem Post. The government was already implementing tax benefits for new immigrants and returning Israelis, but only regarding a 10-year tax exemption on foreign-sourced income, Raab said. "Tax exemption should apply to new business generated inside and outside of Israel to encourage business in Israel," he said. "This is a good time to bring back Israelis and encourage aliya of top-tier finance professionals and investment managers when around the world finance professionals are being laid off. We are getting five to 10 calls a week from finance professionals overseas looking to come here." The Ariav Committee, headed by Finance Ministry director-general Yarom Ariav, has in recent months been faced with much skepticism, mainly because of Ariav's vision for turning the local financial industry into a global financial center resembling London, New York or Singapore, which has been hailed as a daydream at best. "It is not about being another Singapore or London," said Ariav. "We have to develop our own model and build up a sophisticated and advanced capital market, with the aim of creating a financial center in the Middle East." The idea is to repeat the country's success in building up an innovative hi-tech sector and establish Israel as an international financial center - and for finance to become a leading growth engine for Israel's economy. Ariav's goal is to turn Israel into one of the 10 leading financial markets within 10 years, and boost the financial sector to 10 percent of gross domestic product, from the current 4%. "Global financial market means different things to different markets, and its definition is not more than playing with words," KCPS CEO Tal Keinan told the Post. "Those who are judging the feasibility of the vision of the Ariav Committee on whether Israel can become a financial center akin to London or Singapore are just missing the point. "London isn't New York and New York isn't London. The government does not and should not make the decision over what defines a financial market. The exact definition of what constitutes a financial center will be dictated by the market." Keinan believes Tel Aviv can become a financial center, mainly because of the massive concentration of financial minds abroad who want to live in Israel and the potential of human capital in the country. "What is needed is a structure to attract talent to Israel," he said. "There is a lot of talent - portfolio managers who want to be in Israel but couldn't because of the volumes of capital. "Our company is an example that this is starting to happen. We have been able to attract a number of investment professionals, immigrants and returning Israelis from top-tier international investment firms, which, if we were in London or New York, we would have not been able to get." KCPS Israel was established in November 2005. It employs 36 finance professionals, half of them Israelis. Its investors include Psagot's controlling shareholder, York Capital Management LLC, and Michael Steinhardt, one of Wall Street's largest investors and considered one of the pioneers of the hedge fund industry. KCPS private equity's first acquisition in Israel was insurance-software company FIS Solutions Ltd. "Our first choice was to live in Israel and then we looked at what we could do here," Keinan said. "A couple of years ago the feasibility of running a hedge fund out of Tel Aviv would have been just a vision." The liberalization and reforms of the capital markets in recent years, which reduced regulatory obstacles, has rendered the impossible to be more possible, he said. "Our work shows that sophisticated clients, who have access to investment managers in London and New York, are choosing to have money managed by a firm in Tel Aviv - a sign that Israel is already exporting financial services," Keinan said. Eighty percent of the firm's managed money is foreign money, he added. On the domestic level, one of the Ariav Committee's goals is to develop sophisticated and professional "human capital" for the finance industry. For this purpose it is recommending the establishment of an academic institution for financial studies and to broaden finance education at schools. The committee is also recommending the establishment of a court specializing in economic affairs. The proposed court would be a separate entity, run under the auspices of the Tel Aviv District Court. The members of the committee believe that the inefficiencies of existing courts stem from the judges' lack of understanding of complicated financial matters, which are a major obstacle in the country's attempts to improve its financial system and to become an international financial center. Such a court would have another advantage, as it would enforce the training of judges specializing in economic matters, and would greatly improve the efficiency of the legal system in such matters. The Ariav Committee includes Supervisor of Banks Rony Hizkiyahu, Supervisor of Insurance and Savings Yadin Antebi, the Israel Securities Authority chairman, the deputy governor of the Bank of Israel, Prof. Zvi Eckstein and other experts in academia and finance. It is expected to submit its recommendations for attracting greater foreign capital and for developing the local market into more of a competitive global player by the end of August.