Your Taxes: Tax break amendment for industry and technology

Israel has long given tax breaks to preferred investments that have helped expand Israeli industry and technology, pursuant to the Encouragement of Capital Investments Law.

By LEON HARRIS
Money Shekels bills 521 (photo credit: Courtesy)
Money Shekels bills 521
(photo credit: Courtesy)
Israel has long given tax breaks to preferred investments that have helped expand Israeli industry and technology, pursuant to the Encouragement of Capital Investments Law. Recently a controversial clarification was added as an amendment.
How low can your taxes go? Preferred enterprises in development area A pay company tax at a rate of 7 percent in 2013 and the budget bill currently before the Knesset proposes to raise the rate to 10% commencing in 2014.
Preferred enterprises elsewhere in Israel pay company tax at a rate of 12.5% in 2013 and the bill proposes to raise it to 15% starting in 2014.
Dividends paid out of preferred enterprise profits are currently taxed at 15% and this rate may increase in 2014 to 20% according to the budget bill.
Lower tax rates apply to special preferred enterprises of Israeli and foreign multinational corporations with preferred income of NIS 1.5 billion and total revenues of the preferred company NIS 15b. (NIS 20b. in first year).
What is a preferred enterprise? A “preferred enterprise” is an industrial enterprise whose main activity in the year is industrial, excluding mining, quarrying, or oil and gas exploration or production that is competitive and contributes to Israel’s gross domestic product.
This means meeting one of the following: (1) mainly bio or nanotech and approved by the chief scientist; (2) no more than 75% of total income is from sales in any one market in the year concerned; and (3) at least 25% of total income is from sales to a market with at least 12 million residents. Alternatively, it is a competitive renewable-energy enterprise.
What’s new? The requirement to derive income from a market of at least 12 million residents was designed to make companies export 25% of their output. However, it nearly backfired when people realized that the combined population of Israel and the Palestinian Authority, an autonomous area, exceed 12 million. This meant it was no longer necessary to export in order to get the tax breaks.
Consequently, the Knesset passed amendment 70 to the Encouragement of Capital Investments Law on July 1. This raises the requirement 12 million residents’ threshold to 14 million and specifies to increase that number by 1.4% per year.
This neatly reinstates the requirement for a preferred enterprise, not engaged in bio or nanotech, to achieve at least 25% of total income from exports.
However, the amendment has been made retroactive to January 1, 2012. Normally the Knesset does not pass retroactive tax legislation, although there have been instances of amendments taking effect on January 1 at the start of the same tax year.
There is speculation that aggrieved taxpayers may appeal to the Israeli equity court (“bagatz”) to challenge such an amendment that has retroactive effect going back 18 months. Watch this space, just in case.
As always, consult experienced tax advisers in each country at an early stage in specific cases.
leon@hcat.co