Your Taxes: Tax-break development areas

Israel offers industrial and technology firms significant tax breaks to "approved enterprises" and "privileged enterprises."

By LEON HARRIS
taxes good 88 (photo credit: )
taxes good 88
(photo credit: )
Israel offers industrial and technology firms significant tax breaks to "approved enterprises" and "privileged enterprises" under the Law for the Encouragement of Capital Investments, 1959. In general, approved enterprises may receive fixed-asset grants, while privileged enterprises may elect zero company tax on undistributed profits, if certain conditions are met (but see below). The exact mix of grant and tax benefits depends partly on location of the enterprise, and partly on its level of foreign ownership (the higher, the better). Recently, a new regulation was issued that extended Development Area A to include industrial areas within seven kilometers from the Gaza Strip border fence. In addition, Haifa reverted to being part of Area C (not a development area) with effect from 2008. In 2007, hi-tech enterprises in Haifa enjoyed Development Area B status. If an enterprise is located in an area that changed its status, it will continue to enjoy the status that applied when a certificate of approval was issued to an approved enterprise, or in the year of election of privileged enterprises. The privileged-enterprise tax breaks are sometimes referred to as "the green channel," because no advance approval from any governmental body is needed. To claim these privileged-enterprise tax breaks, an Israeli company must effect a minimum investment (NIS 300,000 for a new enterprise, more for an existing one) within three years, ending on the last day of the year first claimed for a project, and export at least 25 percent of its sales, unless it is engaged in biotechnology or nanotechnology. A claim is then attached to the tax return of the year first claimed for a project - no bureaucracy. What are the principal tax breaks and grants on offer? Here is a brief summary: Development Area A - approved enterprise • 24% fixed-asset grants • Exemption from company tax for two years on undistributed profits • 10%-25% company tax for five or eight years (*) • 15% dividend withholding tax Development Area A - privileged enterprise • Exemption from company tax for 10 years on undistributed profits (**) • 15% dividend withholding tax (and 10%-25% company tax if a dividend is paid out of exempt profits) Development Area B - approved enterprise • 10% fixed-asset grants • 10%-25% company tax for seven or 10 years (*) • 15% dividend withholding tax rate Development Area B - privileged enterprise • Exemption from company tax for six years on undistributed profits (*) • 10%-25% company tax for one or four years (*) • 15% dividend withholding tax (and 10%-25% company tax if a dividend is paid out of exempt profits) Development Area C - privileged enterprise • Exemption from company tax for two years on undistributed profits (*) • 10%-25% company tax for five or eight years (*) • 15% dividend withholding tax (and 10%-25% company tax if a dividend is paid out of exempt profits) (*) A company with more than 25% foreign investment is entitled to three more years of tax breaks. (**) On the "Ireland Track" an 11.5% company tax rate and 4% dividend withholding tax applies. Other tax break packages also exist. In the medium to long term, additional changes to the development areas are anticipated. As always, consult experienced tax advisors in each country at an early stage in specific cases. leon.harris@il.ey.com Leon Harris is an international tax partner at Ernst & Young Israel.