The new amendment to the “Law for the Encouragement of Capital Investments” approved by the Knesset under the “Arrangements Law” states that large companies (namely those whose business turnover exceeds NIS 10 billion) will be required to pay Corporation Tax at a rate of 6% and a tax on dividends at 4%. On the other hand, small high-tech companies will be required to pay Corporation Tax at the rate of 12% with the tax rate on dividends also at 4%.
The maximum tax rates currently effective in Israel are 25% Corporation Tax and 25-30% tax on dividends. Under the approved framework of the State budget last week, Corporation Tax is to be reduced to 23%.
In practice, High-Tech companies enjoy reduced taxation under the “Law for the Encouragement of Capital Investments”, which imposes on Exporters a 16% tax rate on exports and lower 7.5% rate for Exporters whose factories are located in the periphery. Another option exists by the name “Strategic” which offers companies the possibility of paying a reduced a tax of 5% -8% subject to compliance with various requirements, but when the dividend tax rate remains in place, 20%.
In order to be considered a High-Tech company for the purposes of the Law, and to be eligible for one of the above-mentioned tracks, the relevant Company will be required to show that at least 7% of its expenditure, or NIS 75 million, is invested in Research and Development (R&D), by means of
- a) Not less than 200 employees (or 20% of the Company’s total employees) are employed in R&D.
- b) Previously, the Company invested or participated in Venture Capital fund worth at least NIS 8 million.
- c) In the last three years, the Company recorded an average growth of 25% per annum in sales and/ or employees.
In addition, there is a provision in the Law authorizing the Directors-General of the Ministries of Finance and Economics and the Director of the Tax Authority to provide stability in a way that guarantees companies with a turnover of NIS 10 billion and above, a ten-year protection from any change in the tax rate to be paid.
The new reform on the taxation of High-Tech companies creates a real opportunity for Israeli and international High-Tech companies to establish their seat in Israel, or at least to establish an Israeli headquarters / branch, thereby benefiting from low tax rates, in an attractive country with the possibility of employing Israeli employees, whilst enjoying financial stability.