Following the budget discussions in Israel for 2011-2012, a major reform in the Law for Encouragement of Capital Investment (hereinafter: “Encouragement Law”), is expected. Once approved, the encouragement law will be changed dramatically in order to enhance Israel’s economic activity and employment. The major changes in the law are brought to you as follows:

Lower company income tax (CIT) for “A Preferred Company”– an Israeli company conducting industrial activity will be entitled to be taxed at a CIT that is lower than the normal CIT (as of 2011 – 24%, gradually declining towards 18% in 2016). the activity must be conducted through “a competitive plant”, as defined by the law. the CIT rate for “A Preferred Company”  is determined based on the location of the plant as follows:

      Development zone A– 8%;

      The rest of the country – 12%.

According to a temporary provision – for tax years 2011-2012 the CIT rates shall be 10% and 15%, respectively. (Jerusalem is defined as development zone A).

Tax on dividend distribution from “A Preferred Company“: dividends paid to an individual shareholder will be taxed at a final rate of 15%, subject to a lower rate set in a tax treaty.

Scope of benefits: according to the bill of amendment, the benefits will apply to the entire income of the competitive plant, and are not limited by time. This provided that the company meets the requirements set by the law during the relevant period. The law also stipulates an accelerated depreciation rate for productive assets used by the company. Furthermore, the said benefits are no longer contingent upon a minimal capital investment of the company, as is currently required.

Shareholders’ residence – under current law, the scope of benefits for companies is linked to the rate of foreign participation. Greater benefits apply to companies with a greater rate of foreign participation. According to the bill of amendment, the benefits granted by the law will apply to a company regardless of the tax residence of its shareholders. The benefits are strictly dependent upon the compatibility of the company (and its activity), with the requirements of the encouragement law.

Preservation of rights: Companies that are entitled to benefits under the current encouragement law will not be affected by the amendments; such is also the case with regards to companies that executed part of a minimal capital investment by the end of 2010.

In addition to the above said, within the economic policy for 2011-2012 discussions, it was recommended to enact tax incentives for investments in Israeli R&D companies that are at “seed stage”. Such investments bare high risks for investors. It is proposed to allow individuals investing in an Israeli R&D company to deduct their investment as an expense. Thus, provided that it was made until the end of tax year 2015 and in return the investor only received shares in the R&D Company. The expense can be deducted over 3 years beginning at the year of investment.

The expense can be recognized against any other income the individual has in Israel such as dividends, rent payment from an Israeli asset etc’. Similar incentives are proposed for such investments that will be made by Israeli companies by the end of 2015. The investment cost will be allowed as an expense spread over 5 years. Regretfully, the proposal does not include incentives for foreign companies investing in Israeli R&D companies. We can only wish the Israeli legislator will consider this issue as well.