The Law for the Encouragement of Capital Investments (5719-1959), generally referred to as the Investment Law, aims to encourage capital investment in areas of national priority and promote economic initiatives by prioritising advanced and innovative industries and strengthening development areas. In order to attain such objectives, the Investment Law provides for two main programmes: the Grants Programme and the Tax Benefits Programme.
The Investment Law has been amended several times since its promulgation in 1959, with the last amendment effective as of 1 January 2017, following the adoption of the Organisation for Economic Cooperation and Development 's Base Erosion and Profit Shifting project to incentivise companies to maintain their intellectual property in Israel.
The 2017 amendment introduced tax benefits for two types of technological enterprises: priority technological enterprises and special priority technological enterprises, in addition to existing programmes.
Technological enterprises must meet all conditions stipulated in the Investment Law as well as the following conditions:
- The company must meet the thresholds for a 'competitive enterprise':
- 25% or more of its total income during the tax year must be from sales to a certain market with at least 14 million inhabitants; or
- its income during the tax year from sales to a certain market must not exceed 75% of its total income from sales in that tax year.
- The company must own its intellectual property and its average research and development (R&D) expenses in the past three years should be at least 7% of its total income or exceed NIS75 million per year.
Further, technological enterprises must meet at least one of the following conditions:
- at least 20% of their employees must be R&D employees or they must employ more than 200 R&D employees;
- a venture capital fund has invested at least NIS8 million in the company;
- in each of the past three years, the company's total income has increased by at least 25%, provided that the total income for each year was at least NIS10 million; or
- in each of the past three years, the company's total number of employees has increased by at least 25%, provided that it employs at least 50 employees.
Priority technological enterprises that meet the above criteria and have a total income during the tax year exceeding NIS10 billion will be classified as special priority technological enterprises.
Subject to fulfilment of the above criteria, companies that derive income from intellectual property developed in Israel or companies that provide software as a service may be entitled to the following tax benefits under the priority technological enterprise or special priority technological enterprise routes:
| Priority technological enterprises | Special priority technological enterprises |
| Corporate tax rate: 7.5% to 12.5% | Corporate tax rate: 6% |
| Dividend tax rate (Israeli resident company): 0% | Dividend tax rate (Israeli resident company): 0% |
| Dividend tax rate (non-Israeli resident company): 20% | Dividend tax rate (non-Israeli resident company): 20% |
| Dividend tax rate (non-Israeli resident company which holds at least 90% of the technological enterprise's shares): 4% | Dividend tax rate (non-Israeli resident company which holds at least 90% of the technological enterprise's shares): 4% |
The Tax Authority recently published a tax ruling addressing priority technological enterprise status with respect to an Israeli company that engages in the development and provision of cloud service platforms.
The ruling provides that, subject to the Investment Law, income derived from the right to use a company's cloud platforms will be classified as income generated by a technological enterprise and, therefore, will be entitled to the Investment Law's reduced tax rates. Further, income derived from the provision of cloud services (eg, backup or storage) from customers that did not also purchase the right to use cloud-based platforms will not be considered the 'preferred income' of a technological enterprise and will be subject to the regular corporate tax rate (currently 23%).
