Your Taxes: Some proposals for reforming tax breaks

Under the proposals, it would no longer be necessary to invest in productive fixed assets.

Recently, the Tax Incentive Policy Review Commission submitted draft proposals for reforming Israel’s tax breaks contained in the Law for the Encouragement of Capital Investments, 1959.
What are the current tax breaks?
In brief, the main Israeli tax breaks in the law for “privileged enterprises” and “approved enterprises” in industry and tourism are: 1. Main “green channel” package: Zero company tax for retained profits. If and when profits are distributed as dividends, the company tax rate will range from 10 percent (if foreign ownership is 90% or more) to 25% (if foreign ownership is below 49%).
In addition, there will be a 15% dividend withholding tax. The company tax benefit period is seven to 10 years.
2. Fixed-asset grants for an approved enterprise: If fixed-asset grants are desired, there is a grant plus low-tax package for an approved enterprise. The grants range up to 32%, depending on location, and company tax rates range from 10% to 25% for seven to 15 years. If profits are distributed, a 15% dividend withholding tax also applies.
3. “Ireland package”: So called because the corporate tax rate can be lower than in Ireland, home to many hi-tech plants. In Development Area A, it is possible to elect 11.5% company tax on retained and distributed profits for 10 years. Dividends are subject to a withholding tax of 4% in the case of foreign-resident shareholders and 15% in the case of Israeli-resident shareholders.
4. Large/strategic investor package: Large investments (NIS 600 million to NIS 900m.) in privileged enterprises by large groups in certain areas of Israel may qualify for zero company tax for both retained and distributed profits as well as exemption from dividend withholding tax. The benefit period is seven to 10 years. This package is for groups with annual revenues exceeding NIS 13 billion to NIS 20b.
5. Foreign-intensive investment company: Such companies enjoy an extra five years of company tax benefit under their selected package; i.e., up to 15 years instead of 10. This applies to an industrial company where the level of foreign ownership exceeds 74% and at least $20m. is invested in an industrial enterprise.
In the last five years of benefit, the company must derive at least 80% of revenues in foreign currency.
Objectives of the new proposals
The proposals are broad. The aims would be to enhance growth in the business sector, improve Israeli industrial competitiveness in world markets, generate jobs and develop the peripheral areas. Priority would be given to innovation in the development area.
Incentive packages now proposed
Under the proposals, the first two tax breaks above would be amended, resulting in two alternative incentive packages: (1) The tax-break package, and (2) The grant and loan package.
It appears that current tax breaks Nos. 3-5 above would be scrapped, so if any of them interest you, you had better move fast to claim them.
Tax-break package proposals
Under the tax-break package, it is proposed that a uniform rate of company tax would apply to all income of industrial export companies (over 25% of revenues from exports). In 2011-2012, the proposed uniform rate of company tax would be 5%-10% in Development Area A and 5%-15% elsewhere in Israel from business activity in Israel. Starting in 2013, the proposed rates of company tax would decrease to 8% in Development Area A and 12% elsewhere in Israel.
In addition, certain “special industrial enterprises” may be granted a further reduced company tax rate of 5% in Development Area A and 8% elsewhere in Israel.
Under the proposals, it would no longer be necessary to invest in productive fixed assets. The tax commissioner would be given the power to allocate the income of enterprises that operate in both Israel and abroad.
Dividends would be subject to a 15% withholding tax, grant and loan package.
Under the grant and loan package, the government’s Investment Center Board would be empowered to generate incentive packages that encourage innovation and efficiency with highly significant benefit to the economy and investment in manpower.
The packages may include professional training, loans to small and medium enterprises, etc. The board would determine grants in Development Area A, with at least 25% of revenues from abroad, of up to 24% (including an administrative grant of 4%).
It is proposed that these grants may be applied to the establishment or expansion of an enterprise or in manpower or any other way that meet’s the objectives of the law.
Who would NOT be eligible?
No tax breaks would be available to government companies or mining, oil and gas enterprises. Partnerships would only be eligible if they are owned by Israeli companies and the plant is an industrial exporter as discussed above.
Effective date?
The proposed new arrangement would apply to income generated starting in 2011 by competitive industrial companies. Existing entities may be allowed to transition to the new benefits.
Note that the new proposals have yet to be accepted by the government, and it remains to be seen what will be legislated by the Knesset.
As always, consult experienced tax advisers in each country at an early stage in specific cases. Leon Harris is an international tax specialist at Harris Consulting & Tax Ltd.