The fog is starting to clear on an issue that has attracted a lot of media attention lately. Rumors were flying around for months that the Income Tax Authorities were about to grant, for a limited period only, enhanced tax benefits on income of companies already enjoying tax benefits.
The ITA issued a statement to that effect, with little detail, late last month and then, on July 9th, a suggested wording of the proposed amendment to the law was published and is expected to attract public comment.
The story is basically that, under the terms of the Law for the Encouragement of Investment, which has been in force in various incarnations for over 50 years, companies meeting specific investment and business criteria were entitled to a complete tax holiday on certain profits for between 2 and 10 years. The sting in the arrangement was that, when the company decided to pay a dividend (or remove cash from the company by other means including intercompany loans), a claw-back of the tax would apply quite apart from the dividend withholding tax imposed. The pain in this case was mitigated by the fact that, in the case of foreign investors, the statutory rate to be paid was generally considerably lower than the standard rate - in many cases as low as 10%.
However, when taken together with a 15% withholding tax (in the absence of treaty benefits) the overall rate of 23.5% has encouraged groups to leave the cash/profits stuck in the company.
Last year the law underwent a fundamental overhaul and the total exemption system was discontinued for new investments.
The authorities, with an eye to closing the book on the old situation – but predominantly (and publicly) seeing the opportunity for a windfall tax-take in a difficult year, now propose additional benefits to encourage companies to draw a line under their tax free profits.
As things stand (and I would stress, any number of changes could occur before the matter is legislated), a window will be opened up until the end of 2013 for companies to decide on paying tax on any chosen percentage of previously untaxed profits accumulated to the end of 2010 that they choose. Such payment will be subject to a discount of the tax paid ranging from 40% to 70% of the appropriate tax rate, the scale rising according to the percentage of untaxed profits the company decides to include. Hence, a company that would previously have paid 10% corporate tax could pay as little as 3%. The 15% withholding tax would still apply when dividends were distributed. Certain conditions will apply, notably that a further investment has to be made in Israel of a proportion (carefully defined) of the amount “freed-up” within a 5 year period.
It remains to be seen how companies and the public react to the proposal, but it promises to be an interesting debate.