The Encouragement of Capital Investments Law
Israel has one of the highest start-ups exit and patent registration per capita ratio in the world. Due to this, many multinational corporations see the potential and build offices in Israel. There are also laws passed by the Israeli government which make multinational business more efficient and therefore promote foreign investment into Israel.
What is capital?
Capital in business refers to money and assets a company has available for its daily operations. Some major types of capital include:
- Working capital
- Debt
- Equity
- Trading capital
What are capital investments?
Capital investments are when a company acquires money to further its business goals and objectives. They can also refer to a company acquiring physical assets and other technologies which facilitate a more efficient enterprise. Some capital investments may include investments in:
- Land & buildings
- PP&E
- New technologies
What are capital investment laws?
Capital investment laws are the laws passed by governments that deal with capital investments. Like other types of law, these vary by country. In Israel, various programs were established to attract capital to Israel, encourage economic initiative, and increase investment of foreign and local capital. Two of these programs are the Grants Program and the Tax Benefits Program
How does Israel use these laws?
The Israeli capital investment law encourages investment in areas targeted by the Israeli government. These laws facilitate economic growth by prioritizing advanced and innovative industries and by strengthening development areas.
Specifically, the Encouragement of Capital Investments Law, 5719-1959 encourages capital investment in areas the Israeli government chooses. The goals of the law are to facilitate economic growth and strengthen development areas. These goals are meant to work together to improve the country’s production capacity, improve the efficiency of Israel’s business sector, and create infrastructure for new and sustainable workplaces. The law does all this by giving out grants and tax breaks.
For example, the 7th chapter of the Israeli capital investment law allows grants to be given on rental housing construction, which is then given to developers as tax breaks when they receive leasing revenues.
Further benefit tracks have recently been added under administrative Director-General directives. These are meant to help industrial factories plan investment opportunities and set up dynamic new factories in the periphery of Israel. The goal of these further benefit tracks is to strengthen and encourage investment in areas of national priority.
The agency in charge of applying the capital investment law is the Authority for Investments and Development of the Industry and Economy. This agency evaluates applications for grants; they use criteria such as competitiveness in international markets, use of dynamic technologies, number of jobs created, contribution to the national economy, etc. Unfortunately, government-owned companies are not eligible for grants or tax breaks, but mixed public-private companies can receive grants only for the privately-owned part.
What are some Specific Programs?
The Grants Program:
- Grants are accorded at up to 20% of the amount of investment in fixed assets
- Investments in the south/Negev area may have an additional 10%
- Applying companies must meet criteria listed here: https://investinisrael.gov.il/BusinessInIsrael/Pages/Investment_incentives.aspx
The tax benefits program:
This program grants significant tax benefits to new and returning residents. One part of it is an exemption for 10 years from tax and reporting assets and income generated outside Israel. This program makes companies eligible for tax benefits by granting them either “Priority Enterprise” or “Special Priority Enterprise” status. Applying companies must meet application criteria listed here: https://investinisrael.gov.il/BusinessInIsrael/Pages/Investment_incentives.aspx
The following table summarizes the tax benefits for industrial companies and companies engaging in R&D. The rates below are subject to the fulfillment of all conditions specified in the law.
| Industrial Companies | R&D Companies | |
| Dividend Tax Rates | 20% | 20%
Dividend distributed to a non-Israeli company – 4% |
| Reduced corporate tax rate | 7.5% – 16% | 7.5% – 12% |
| Reduced capital gains tax rate | 6% – 12%
Under certain conditions |
|
| Depreciation rate | Accelerated depreciation for productive assets:
200% for machinery/equipment 400% for buildings (up to 20%/year) |
The following presents the tax incentives presented by the “Encouragement of Capital Investments Law”
| Tax benefits | Corporate income tax rates | Dividends tax rate | Income tax on IP revenue | Notes | |||
| Development area A | Other areas | Individual | Foreign company | Israeli company | |||
| Without the law | 23% | 23% | 30% | 30% | 0% | 23% | Dividend tax for individual who is not a major shareholder is 25%. |
| Prioritized enterprise | 7.5% | 16% | 20% | 20% | 0% | 23% | |
| Prioritized enterprise – Over 10B ₪ | 5% | 8% | 20% | 5% | 0% | 23% | Foreign company – Full ownership |
| Prioritized technological enterprise | 7.5% | 12% | 20% | 4% | 0% | 12% | If a foreign entity/individual holds more than 90% of the shares – capital tax benefits will be granted under certain conditions. |
| Special Prioritized
technological enterprise |
6% | 6% | 20% | 4% | 0% | 6% | Capital tax benefits are under certain conditions |
