Encouragement of Capital Investments Law

Encouragement of Capital Investments Law

Understanding the Capital Investments Law: Its Purpose and Potential Benefits

The Capital Investment Promotion Act of 1959 has undergone many amendments since it was enacted. The Encouragement Law in its original form was intended to attract capital to Israel and to encourage economic initiative and foreign and local capital investments.

In the period following the ratification of Amendment 68, the objectives of the Capital Investment Encouragement Law were changed. Accordingly, its objectives have been changed to the following objectives: to develop the country’s production capacity, to improve the business sector’s ability to cope with competitive conditions in international markets, and to create infrastructure for new and sustainable jobs. Examining a company’s compliance with the terms of the law will be done in light of the goals of the law, as they are presented in its current version.

As part of the Economic Efficiency Law from 2016 (Legislative Amendments for the Implementation of the Economic Policy for the Budget Years 2017 and 2018), Amendment 73 was made to the Law for the Encouragement of Capital Investments, 1959 (hereinafter: “Amendment 73”). The purpose of amendment 73 was to adapt the law to the knowledge-intensive industry, in order to encourage suitable companies to establish themselves and expand their activities in Israel. As well as determine an incentive to encourage new activity in Israel and increase the level of productivity and innovation.

The Three Main Purposes of the Capital Investment Encouragement Law:

  • To facilitate the expansion of the country’s production capacity.
  • To enhance the business sector’s capacity to effectively compete in international markets.
  • To create infrastructure for new and sustainable jobs.

To qualify for significant tax benefits and grants under the Investment Encouragement Act, corporations must meet certain conditions, which can be verified through a dedicated verification process. Companies that meet these conditions will be eligible for substantial tax incentives and benefits.

The Main Conditions for the Application of the Capital Investment Encouragement Law on a Preferred Enterprise:

  • A preferred company with a “preferred factory” incorporated in Israel. A preferred plant is an industrial plant that is a competitive plant as defined below.
  • An industrial plant refers to a company primarily engaged in production activities, involving the transformation of raw materials into finished products, with some exceptions. There is no specific legal definition of a factory, particularly in the context of software development. However, decisions by the Tax Authority, such as 6003/19, have considered the presence of an office as a relevant factor. An industrial enterprise typically excludes mining and other extractive activities, oil exploration or production as defined by the Petroleum Law, 1952, and agricultural enterprises defined by the Law for the Encouragement of Capital Investments in Agriculture, 1980. The law does not prescribe a minimum number of employees for an industrial plant to exist, although the Tax Authority has previously set a minimum of ten employees. While this directive is no longer in effect, having a certain minimum number of employees may still confer advantages. For a technological plant, it is sufficient to have an intangible asset in ownership or right of use.
  • A plant is defined as “competitive” and exports abroad if it meets the following conditions:
    1. Its main activity is in the field of biotechnology or nanotechnology, and it has been approved by the National Authority for Technological Innovation, prior to the approval of the program as stated in this section.
    2. Its income, in the tax year, from sales in a specific market, does not exceed 75% of its total income from sales that tax year.
    3. 25% or more of its total income, in the tax year, from factory’s sales, are from sales in a particular market of at least 14 million residents (note- in fact more than that – the amount increases from year to year).
  • Preferred Income – The income generated from activities carried out in Israel can take several forms, such as revenue from the sale of products produced in the same factory, including their components manufactured in another factory. It can also include income from granting the right to use knowledge or software developed in the factory, such as fees for software usage. Additionally, income from ancillary sales services and income from industrial research and development for foreign residents, for which a scientist’s approval has been issued, can also be included.
  • The definition of a preferred company includes a company that was incorporated in Israel, follows the legal guidelines regarding bookkeeping, has not committed offenses, etc.

To get recognized as a preferred technological enterprise (as opposed to a preferred enterprise) and to receive the more significant benefits from its power – additional conditions are required, The following are the main ones:


  • The fixed conditions regarding a preferred plant as detailed above
  • Expenditures classified as research and development expenses according to the generally accepted accounting rules (hereinafter: “R&D”) of the enterprise, in the three years preceding the tax year, were at least 7%, on average, per year of the company’s total income or exceeded 75 million NIS per year. And if the plant was established during these years – regarding its R&D expenses in the period from the date of its establishment. The Tax Authority Circular (09/2017) stipulates that they will be considered as recognized R&D expenses, including any of the following: wages, direct expenses, general and administrative expenses that were used directly for R&D activity, the cost of materials if they were used directly for company’s R&D activity.
  • The company that owns the plant must meet one or more of the following conditions:
    1. 20% or more of the company’s employees are R&D employees or the company employs at least 200 R&D employees.
    2. A venture capital fund has invested at least 8 million NIS in the company, and the company has not changed its line of business after the date of the investment.
    3. The company’s revenue turnover in the tax year and in the three tax years preceding it, was 10 million NIS or more, and its revenues in the three years preceding the tax year increased by an average of 25% or more in comparison to the tax year that preceded them.
    4. The company employed in the tax year and in the three tax years that preceded it at least 50 employees, and the number of employees in the three years prior to the tax year increased by 25% or more on average compared to the tax year that preceded them.
    5. As to the conditions pertaining to the employee- and in accordance with Circular 9/2017 (page 13) employee, “Including an individual who is not legally registered as an employee of the company but is at the disposal of the company provided that he is employed in the company’s plant exclusively.”
    6. The revenue turnover of the company that owns the factory is less than 10 billion NIS.

Preferred Technological Income

Preferred technological income is an income that was generated during the ordinary course of business of the enterprise from an intangible asset which is wholly or partly owned by the enterprise, or which the enterprise has the right to use, including any of the following:

  1. Income from granting the right to use the beneficiary intangible asset
  2. Income from a software-based service
  3. Income from a product in which the plant made use of the beneficiary intangible asset
  4. Income from an ancillary or supporting product to a computer program or product as stated in paragraph (3), provided that the product was directly related to the beneficiary intangible asset and one of the following exists for it:
    1. No other intangible asset was used in its production
    2. In its production, there was the usage of another intangible asset that is not owned by the company that owns the factory or a related party, and that it or the party related to it does not have the right to use it
  5. Income from ancillary service for the granting of a usage rights, service, or product as stated in paragraphs 1 to 3 or supports any of those as stated in paragraphs 1 to 3, as the case may be;
  6. Income from the sale of research and development services that does not exceed 15% of the plant’s revenue

Intangible assets including copyright, software, etc.

Additional Conditions for a Technological Enterprise from Regulations to Encourage Capital Investments:

Regulation 3 of the Capital Investment Encouragement Regulations contains additional requirements for the existence of a technological enterprise:

  • The number of employees in Israel in the said tax year was not less than 20% or more than the average number of employees in Israel in the two tax years preceding the year in which there was for the first time a technological enterprise.
  • The cost of wages in Israel in the said tax year was not less than 20% or more than the average cost of wages in Israel in the two tax years preceding the year in which there was for the first time a technological enterprise.

In some cases, instead of the additional conditions for a technological enterprise, it is possible to obtain approval from the National Authority for Technological Innovation. Technological income is part of the income derived from R&D in Israel according to the “Nexus” formula.

Nexus formula:

Total Income in IP x (130% x eligible expense for IP (independent R&D/ the purchase of intellectual property etc.) /Total IP Expenses)

Total expenses, i.e., the denominator (including “bad” expenses):

The reception of R&D services from related parties abroad, royalties to a foreign company and the cost of acquiring knowledge to a foreign company, purchase of an asset not made in Israel, undocumented “good” expenses, R&D services by an unrelated party in Israel if the number of employees and wages have been reduced by at least 20% in comparison to the year the company was first considered a technological enterprise.

The formula will apply to all companies that implement the Capital Investment Encouragement Law starting from 1/7/2021. In the case of an intangible asset purchased after 30/6/16, the formula will apply as early as 1/1/17.

In accordance with the Income Tax Circular 09/2017 – currently, many areas of the software industry currently operates in a software-based services model such as a sales model- Service As A Software and not just a licenses business model. Accordingly, even in the case where no license is granted but access to the software is provided through cloud computing over the Internet, it will be considered technological income. Software-based services are currently provided in various industries such as: internet advertising, finance, and more. Income from supplying such services will be considered as “technological income” provided that it is in fact derived from the software itself. In this regard, it is important to emphasize the need of an examination of the nature of the company’s activity as a software development company and not as a service-based company and the nature of the company’s income that derives from the software services.

Additional Incentive Laws


The Angels law

 The Angels law was enacted as part of a temporary provision which purpose was to encourage investors to invest in ventures in the early stages. The temporary order expired at the end of 2019, but it is not inevitable that the rationale underlying the temporary order will be reflected in further legislative proceedings soon.

Read here about the Law of Angels here.

Below is a table showing the tax benefits under the Capital Investment Encouragement Law:

Tax Benefits


Tax Rate




Capital Gains from selling IP



Development Area A

Other Development Areas


Foreign Company




Without the law of encouragement







Dividend to a non-substantial shareholder (25%)

Preferred Enterprise








Preferred  Enterprise

Above 10 billon







Foreign Company with full holding

Technological Preferred  Enterprise







Foreign Company with over 90% of the shares (obtains capital gains benefits under certain conditions)

Special Preferred  Technological Enterprise







Obtains capital gains benefits under certain circumstances.

*Possibility for a grant in the case of an industrial plant – the grant rate is 20% of the total approved investments included in the business plan that was approved for the corporation.

Click here to read about other types of tax planning.

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