The State of Israel encourages local and foreign investment by offering a wide range of incentives and benefits to investors in industry, tourism, and real estate. Special emphasis is given to high-tech companies and R&D activities.
- Preferred Technology Enterprise (PTE) regime (Encouragement Law)
Key eligibility conditions
To be eligible for the SPTE regime, a company must meet the eligibility conditions of a PTE above and be part of a group of companies with aggregate annual revenues of at least ILS 10 billion.
Corporate tax rates
Under the SPTE regime, a reduced corporate tax rate of 6% shall apply on qualifying income, subject to detailed qualifying rules. The reduced tax rate shall apply only with respect to the portion of IP developed in Israel based on a nexus approach.
Capital gain on sale of IP
Companies that sell IP to a related foreign company may qualify for a reduced 6% capital gains tax rate, provided that the company developed or acquired the IP from a foreign company after 1 January 2017, subject to the approval of the Israeli Innovation Authority.
Dividend WHT rate
The dividend WHT rates are the same as under the PTE regime, discussed above.
- Special exemptions for non-residents
Publicly traded Israeli shares
Non-residents corporations not having a permanent establishment (PE) in Israel are exempt from tax on capital gains from the sale of shares of an Israeli company traded on the Israeli stock exchange or on a foreign stock exchange.
Certain exceptions apply
Where the shares were purchased by the non-resident prior to being publicly traded, subject to the availability of exemptions detailed below, capital gains tax might apply for the portion of the gain that was generated up to the day of the share’s public listing but not to exceed the capital gain actually arising upon the sale of the share and provided that the value on the day of public listing was more than their value on the date of purchase and that the proceeds upon sale exceeded the value on the date of purchase.
Non-publicly traded shares
For purchases after 1 January 2009, an exemption exists under domestic law for non-residents, regardless of their percentage holding in an Israeli company, from gains derived from the sale of securities not traded on a stock exchange, provided the following conditions are met:
- The investment is not in a company in which, on the date of its purchase and in the two preceding years, the main value of the assets held by the company, directly or indirectly, were sourced from an interest in
- Real estate or in a real estate association (as defined in the Income Tax Ordinance [ITO]);
- The use in real estate or any asset attached to land;
- Exploitation of natural resources in Israel; or
- Produce from land in Israel.
- The capital gains were not derived by the seller’s PE in Israel.
- The shares were not purchased from a relative (as defined in the ITO) or by means of a tax-free reorganization.
A non-resident company shall not be eligible for this exemption if Israeli residents are controlling shareholders or benefit or are entitled to 25% or more of the income or profits of the non-resident company, either directly or indirectly.
For shares purchased between 1 July 2005 and 1 January 2009, more restrictive conditions apply in order to be eligible for the exemption. Detailed rules apply.
- Treaty exemption
Non-residents may qualify for a tax treaty capital gain exemption, depending upon the particular circumstances and the provisions of the applicable tax treaty (e.g. in some tax treaties, no capital gains exemption is allowed where the holding in the sold Israeli company exceeds a certain percentage).
When assets are attributable to an Israeli PE or are real estate rights (including rights in a real estate association), a treaty exemption will generally not be available.
- High-Tech Industry Encouragement Law
The law aims to promote investments in technology and high-tech companies in Israel through various tax benefits.
Below is a summary of the key points:
- Tax Benefits for Investors in Start-Up Companies: The law provides tax credits for investors in start-up companies, reducing their tax liability and encouraging further investments in the sector.
- Deferral of Capital Gains Tax: Investors who sell shares in a company and use part of the proceeds to invest in a start-up company can defer the payment of capital gains tax.
- Deduction of Investment in Shares as an Expense for Tax Purposes: Companies acquiring control of other companies, whether Israeli or foreign, can deduct the cost of the investment over five years after gaining control.
- Tax Exemption for Foreign Financial Institutions: Foreign financial institutions receive a tax exemption on interest income or linkage differentials paid by an Israeli company as part of loan repayment.
- Extension of Tax Benefits for R&D Companies: The law extends the benefits stipulated in Section 92A of the Income Tax Ordinance, allowing investment in shares of an R&D company to be recognized as a capital loss in the year the investment was made
Note: Most of the benefits are provided to Israeli investors, as under Israeli law, foreign investors are generally exempt from capital gains tax on profits generated in Israel, provided the capital gain does not arise from a permanent establishment in Israel
Legal Disclaimer
The information presented herein is intended solely for general informational purposes and provides a high-level overview of potential tax benefits. It does not, under any circumstances, constitute legal, financial, or investment advice.
Readers are hereby warned not to interpret any of the contents as a recommendation, solicitation, or endorsement to make any investment decisions. The highlights provided are neither comprehensive nor definitive. For full details, up-to-date regulations, and official conditions, you must consult directly with the Israeli Tax Authority or seek advice from a qualified professional.