The benefits of investing in Israel are manifold but not always manifest. Tax rates are dropping and generous incentives are available. There are no currency or ownership restrictions. Resident companies are subject to Israeli tax on their worldwide income. A company is fiscally resident in Israel if it is incorporated in the country, or its business is controlled and managed in Israel. Non-residents are only taxable on Israeli source income. The regular rate of company tax is scheduled to be 29 percent in 2007, 27% in 2008, 26% in 2009 and 25% in 2010 and thereafter. Subject to any tax treaty, the standard rate of dividend withholding tax in 2006 is 20% for shareholders who hold under 10% of the company and 25% for 10%-or-more "material shareholders." Consequently, in 2007, distributed profits will generally be taxable at 43.2% - 46.75%. Lower tax rates apply to "Privileged Enterprises" and "Approved Enterprises" in the industrial, technology and hotel sectors, pursuant to the Law for The Encouragement of Capital Investments, 1959. The "Privileged Enterprise" benefits are sometimes referred to as the "Green Channel" since the benefits are now easy to elect. The main "Privileged Enterprise" benefit packages on offer are as follows: - Main Package: Zero company tax for retained profits. If and when profits are distributed as dividends, the company tax rate will range from 10% (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 combined Israeli taxes on distributed profits will, therefore, be 23.5%-36.25%. The company tax benefit period is 10 years in Development Area A. Elsewhere in Israel, the benefit period is seven years, but a 10-year period is granted to a Foreign Investors' Company in which foreign residents have invested NIS 5 million. - 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. If profits are distributed to foreign resident shareholders, a 4% dividend withholding tax rate applies, resulting in total Israeli taxes on distributed profits of 15.04%. A 15% dividend withholding tax rate applies to Israeli resident shareholders, resulting in total Israeli taxes on distributed profits of 24.8%. - Large/Strategic Investor Package: Large investments (NIS 600m.-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 7-10 years, as mentioned above. This package is for groups with annual revenues exceeding NIS 13 billion - NIS 20b. - "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. To claim "Privileged Enterprise" status, a minimum qualifying investment must be made in fixed assets - only NIS 300,000 over three years for new start-ups. Existing enterprises must invest also expand their fixed assets by 5%-12% according to detailed rules. In addition, "Privileged Enterprises" (and "Approved Enterprises" - see herein) must be competitive and not overly dependent on the market of any one country. This translates into a 25% export requirement in all industries except biotechnology and nanotechnology. 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 7-15 years. If profits are distributed, there is a 15% dividend withholding tax. The resulting combined Israeli taxes on distributed profits may range from 23.5% to 36.25%. Incentives for other sectors also exist. Approved industrial, commercial and residential rental properties qualify for reduced company tax rates on rental income and on sale gains if at least 70% of the floor space is rented out for residential purposes for at least five years. The reduced company tax rates range from 10% to 18%. A tax holiday or grants may be available to approved industrial properties, depending on their location. Dividends are subject to a 15% withholding tax. Interest derived by foreign residents on "Patach" foreign currency bank deposits held for non-business purposes is exempt. Preferential tax treatment is available for: Real Estate Investment Trust (REIT) companies; agriculture; oil; movies; international trading; research and development (R&D) financing. Significant non-tax incentives include grant or loans for research and development (typically 50%), incubator parks and small businesses. With regard to capital gains, subject to any tax treaty, foreign residents are taxable on Israeli source capital gains at varying rates (individuals: 20%-49%; companies: 25%-29%). Nevertheless, foreign residents not doing business in Israel may enjoy an exemption in the case of: securities traded on the Tel-Aviv Stock Exchange; securities of Israeli companies traded on a recognized foreign stock exchange; shares in a research-intensive company that were issued to the foreign resident investor on or after January 1, 2003; venture capital funds that obtained an advance tax ruling from the Israeli tax authorities; and investments in Israeli securities made from July 2005 to December 2008 and reported within 30 days by residents of a country that has a tax treaty with Israel during the 10 years before their investment. All in all, Israel offers a tax-beneficial capitalist climate. [email protected] The writer is an International Tax Partner at Ernst & Young Israel.