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.
Privileged Enterprise tax breaks
The Economic Efficiency Law enacted on July 14 extends tax breaks for "privileged enterprises" to renewable-energy businesses.
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.
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• 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
• 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.
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
• 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
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.
Leon Harris is an international tax specialist.
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