{"id":1218,"date":"2018-10-28T08:22:07","date_gmt":"2018-10-28T08:22:07","guid":{"rendered":"http:\/\/ekw.co.il\/?p=1218"},"modified":"2018-10-28T14:28:30","modified_gmt":"2018-10-28T14:28:30","slug":"important-amendments-encouragement-capital-investments-law","status":"publish","type":"post","link":"https:\/\/ekw.co.il\/en\/important-amendments-encouragement-capital-investments-law\/","title":{"rendered":"Important Amendments to the Encouragement of Capital Investments Law"},"content":{"rendered":"

The Encouragement of Capital\u00a0Investments Law, 57191959-\u00a0(hereinafter: the “Law”<\/strong>) is designed to encourage investment in the Israeli industry\u00a0and\u00a0there is\u00a0a dual purpose\u00a0for its legislation: First\u00a0–\u00a0to promote Israel in comparison to other countries by awarding tax incentives;\u00a0second\u00a0–\u00a0to encourage the maintenance of businesses in\u00a0the\u00a0Israeli periphery.<\/p>\n

In recent years, several amendments have been made to the Law\u00a0(primarily Amendment 68 and Amendment\u00a073),\u00a0which introduced a\u00a0comprehensive\u00a0reform\u00a0in the\u00a0manner in which the benefits included in the Law can be used.<\/p>\n

As we shall see in this article,\u00a0the main goal of the said amendments was to encourage manufacturers\u00a0and industrialists,\u00a0both local and foreign,\u00a0to set up factories in Israel instead of abroad,\u00a0a\u00a0global\u00a0trend\u00a0of many countries\u00a0that is becoming more prevalent lately around the world,\u00a0particularly since the beginning of the presidency of Donald\u00a0Trump, who seeks to encourage many American companies to return and re-open production factories in the United\u00a0States.<\/p>\n

Introduction<\/u>:<\/p>\n

As stated above, the\u00a0purpose of the law is a dual purpose;\u00a0both to promote Israel in the\u00a0“tax competition”\u00a0with other countries and to encourage businesses in the peripheral areas of Israel.<\/p>\n

The law and the regulations installed by virtue of it, effectively determine two kinds of incentives<\/a>[1]<\/a>:<\/p>\n

    \n
  1. Incentives whose main purpose is to increase economic growth,\u00a0which aim at increasing\u00a0investments in the economy as a whole.<\/li>\n
  2. Incentives whose main purpose is the development of the periphery,\u00a0in such way that these are intended to influence the spreading of the industry throughout Israel and increase activity and investments in the periphery.<\/li>\n<\/ol>\n

    The benefits included in the Law are granted when there is an establishment or expansion of an industrial factory or a tourist enterprise\u00a0in two tracks\u00a0–\u00a0the grants track and the tax benefits track.<\/p>\n

    Important amendments to the law\u00a0in recent years:<\/u><\/p>\n

    Two major amendments to the\u00a0law\u00a0have been approved in recent years, dramatically affecting it. The first and major one is Amendment\u00a068\u00a0of\u00a02012,\u00a0which we will elaborate on below. The second,\u00a0which will not be discussed in this article, is Amendment\u00a073\u00a0of\u00a02017,\u00a0which relates mainly to income from intangible assets. In parenthesis, we shall add that in the past few days, the Israli tax authority has updated its policy to include the stipulations of the Law also on startup companies.<\/p>\n

    Until Amendment\u00a068, the\u00a0law placed an emphasis on attracting capital to Israel and encouraging economic initiatives and foreign capital and local capital investment,\u00a0inter alia, in order to develop the production capacity of the country’s economy, improve the country’s balance of payments and absorption of immigrants.\u00a0Within Amendment\u00a068 to the\u00a0Law,\u00a0it was decided to provide a more comprehensive and appropriate answer to the\u00a0economic challenges that the Israeli economy faces in general,\u00a0and the industrial sector in particular.\u00a0Therefore, the\u00a0purpose of the law was changed so that the emphasis was placed on innovation and activity in development areas, to develop the economy’s production capacity,\u00a0improve the competitiveness of the business sector in international markets and create more work places.<\/p>\n

    The Amendment changed both the tax benefits track and the grants track.\u00a0For example, as part of the grants track,\u00a0the mechanism regarding grants in the industry was extended also to investments in non-physical capital,\u00a0with the purpose of expanding the mechanism to other areas that could develop the industry,\u00a0such as the training and development of workers.<\/p>\n

    As\u00a0part\u00a0of\u00a0the tax benefits\u00a0track,\u00a0prior to the\u00a0Amendment,\u00a0the Law\u00a0established a complex benefits mechanism, which often created uncertainty amongst investors with respect to the tax rates they had to pay\u00a0in practice,\u00a0and\u00a0therefore, could significantly harm Israel’s ability to attract investments to the industry.\u00a0Under Amendment\u00a068,\u00a0an extensive change was made in Article\u00a051\u00a0of the Law, by adding\u00a0mark B1\u00a0and- B2\u00a0of Chapter VII\u00a0of the Law,\u00a0under which the tax benefits mechanisms for a “preferred company” that is the owner of\u00a0a “preferred\u00a0factory” were founded, as well as tax benefits mechanisms for\u00a0a “preferred\u00a0company”\u00a0that is the owner of a “Special preferred factory”.<\/p>\n

    More specifically,\u00a0we shall note briefly that\u00a0a “preferred\u00a0company”\u00a0(a\u00a0company incorporated in\u00a0Israel,\u00a0which is not fully owned\u00a0by the government and which meets\u00a0a number of cumulative conditions provided by\u00a0law),\u00a0which owns a “preferred factory” \u00a0(an\u00a0industrial factory which meets the terms of\u00a0“competitive\u00a0factory”\u00a0that are listed in Article\u00a081A\u00a0of the Law)\u00a0and has\u00a0“preferred income” (income that is derived from the Israeli activity of the preferred factory)\u00a0will be entitled to a preferred tax rate on the total<\/u> preferred\u00a0income\u00a0of the preferred factory. Therefore, as of 2015 onwards, preferred factories could benefit\u00a0from a reduced tax rate of 6% in development areas A\u00a0(as defined in the\u00a0Second\u00a0Addition to the\u00a0Law)\u00a0and 12%\u00a0in areas which are not development\u00a0areas A.\u00a0These tax rates are much lower than those that prevailed prior to Amendment\u00a068.<\/p>\n

    In\u00a0addition,\u00a0Amendment\u00a068\u00a0set out additional tax\u00a0benefits,\u00a0inter alia for “special preferred factory”\u00a0(as\u00a0defined by law),\u00a0in distributing dividends and by accelerated depreciation.<\/p>\n

    As described\u00a0below,\u00a0the\u00a0objectives\u00a0of the new law\u00a0are in line with the prevailing trend around the world in recent\u00a0years,\u00a0as can be seen in\u00a0the American\u00a0economy.<\/p>\n

    The Amendments to the Law in Light of the Prevailing Global Trend:<\/u><\/p>\n

    As noted above, the\u00a0change in the purposes of the law was such that the emphasis was given to developing the economy’s production capacity,\u00a0improving the competitiveness of the business sector in international markets and creating more work places.\u00a0The common denominator of these goals is actually strengthening local production rather than production in foreign countries that are considered\u00a0cheaper for such activity (such as China, Turkey, etc.).<\/p>\n

    This trend is not unique to the Israeli economy\u00a0but is becoming increasingly common among\u00a0other\u00a0countries\u00a0around the world.\u00a0For example,\u00a0in the United States, President Trump\u00a0tries to create work places and strengthen local production\u00a0by\u00a0imposing taxes on imported goods from\u00a0China.\u00a0In contrast to the approach adopted in Israel, i.e.\u00a0the granting of\u00a0tax benefits and grants to encourage production and reduce\u00a0costs,\u00a0in the United States,\u00a0in light of the difficulty\u00a0to make production\u00a0considerably cheaper and\u00a0affordable,\u00a0Trump\u00a0chose to impose restrictions\u00a0(in\u00a0the form of\u00a0taxes)\u00a0which will make production in\u00a0other\u00a0countries\u00a0more\u00a0expensive.\u00a0It may not be the same method, but the final goal is identical- encouraging the local production industry and creating new work places.<\/p>\n

    Conclusion<\/u>:<\/p>\n

    Thus,\u00a0in recent years,\u00a0it is more beneficial for local industrialists and manufacturers to receive the\u00a0benefits and grants granted by the Encouragement of Capital Investments\u00a0Law,\u00a0and to set up their factories in\u00a0Israel.\u00a0By exploiting the mechanisms that are established\u00a0by Law,\u00a0manufacturers have the potential to increase their profits\u00a0while making a significant contribution to the Israeli economy’s production capacity,\u00a0improving the competitiveness of the business sector in international markets, and creating work places in the periphery.\u00a0It is a win-win situation in every aspect.<\/p>\n

    [1]<\/a> Income Tax Notification no. 3\/2012 of the ISA, dated 10.6.2012.<\/p>\n","protected":false},"excerpt":{"rendered":"

    The Encouragement of Capital\u00a0Investments Law, 57191959-\u00a0(hereinafter: the “Law”) is designed to encourage investment in the Israeli industry\u00a0and\u00a0there is\u00a0a dual purpose\u00a0for its legislation: First\u00a0–\u00a0to promote Israel […]<\/a><\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[1],"tags":[66,431],"class_list":["post-1218","post","type-post","status-publish","format-standard","hentry","category-uncategorized","tag-corporate-law","tag-the-encouragement-of-investments-law"],"acf":[],"yoast_head":"\nEKW - Important Amendments to the Encouragement of Investments Law<\/title>\n<meta name=\"description\" content=\"The Encouragement of Capital\u00a0Investments Law, 57191959-\u00a0(hereinafter: the "Law") is designed to encourage investment in the Israeli industry\u00a0and...\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/ekw.co.il\/important-amendments-encouragement-capital-investments-law\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"EKW - 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