Your Taxes: Privileged-enterprise tax breaks for renewable-energy projects

Electric-power generating units at a hybrid solar- (photo credit: LEON HARRIS   )
Electric-power generating units at a hybrid solar-
(photo credit: LEON HARRIS )
Israel has always had a penchant for renewableenergy. For example, building regulations require solar water heatersto be installed in new projects.

The Economic Efficiency Law enacted on July 14 extends tax breaks for "privileged enterprises" to renewable-energy businesses.

Privileged Enterprise tax breaks

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 investorshoping to enjoy capital gains from an exit rather than dividends.

• 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 thesame low taxes but no exemption. Instead it may receive fixed-assetgrants 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 tourismenterprise. If industrial, the main activity in the tax year isproductive; this may include software products and industrial researchand development for a foreign resident approved by the ChiefScientist's Office.

• A "minimum qualifying investment" must be made in fixedassets in industry (or a tourism enterprise) in Israel (only NIS300,000 over three years for new start ups). For existing companies, thenew investment must also exceed 5%-12% of the tax-depreciated value offixed assets other than buildings at the end of the preceding tax year.

• Privileged Enterprises and Approved Enterprises must becompetitive and contribute to gross domestic product (GDP). Inpractice, this translates into a 25% export requirement in allindustries except biotechnology and nanotechnology.

Renewable-energy projects

This amendment refers to an enterprise that is primarily activein research and development in renewable energy (derived from solarradiation, wind, biomass or other sources but not fossil fuel) or theproduction of plants in this field. This does not include the sale ofelectricity 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 beingsuitable for research and development. This can be done not only at theR&D stage but also at the productive stage.

Such a renewable-energy enterprise is considered to be acompetitive enterprise that contributes to GDP without regard toexports (such as biotech and nano-tech enterprises), making it eligiblefor privileged-enterprise tax breaks.

In addition, a subcontractor that sells components used in arenewable-energy enterprise will be considered a privileged enterpriseif

• 25% or more of overall revenues in the tax year are fromsales to an enterprise primarily active in renewable energy or salesrelating to the construction of a plant based on renewable energy;

• 15% or more of overall revenues in the tax year are to arenewable-energy enterprise in Israel, plus 10% of overall revenues aredirect exports to customers in a market with a population of at least12 million.

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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