Large multinational tech companies investing in Israel are entitled to a wide array of incentives, benefits and grants, making Tel Aviv a welcoming and attractive destination for foreign companies.
Corporate Income Tax- The corporate income tax rate in Israel is 23%. Israeli resident companies are subject to tax on worldwide profts and gains. A non-resident company is subject to tax only on Israeli-sourced profts, which include, among other things, income derived from a permanent Israeli establishment or income accrued and generated in Israel.
Tax on Dividends
Dividends payable to a company (foreign or Israeli) by an Israeli company, resulting from income generated or accrued in Israel, are exempt from tax. Dividends payable to Israeli companies from income generated or accrued from abroad, or dividends received from abroad, are subject to a 25% tax.
Dividends paid to shareholders who hold under 10% shareholding in the company are subject to a 25% withholding tax. Dividends paid to more signifcant shareholders who hold over 10% of the company (or who held over 10% shareholding in the company in the preceding year) are subject to a 30% withholding tax.
VAT- The VAT rate in Israel is 17%.
Intellectual Property Incentives- A company that creates IP assets in Israel, or is willing to transfer some IP to Israel, is entitled to signifcant benefts. Benefts include reduced tax in the following areas: income corporate tax (6%, 7.5% – 12%), dividend tax (up to 4%) and capital gains/exit tax (6%,12% - over/under $2.5B global turnover).
Reduced Tax Rates for Priority and Technological Enterprises
A company is eligible for reduced tax rates if its enterprise is granted a ‘Priority Enterprise’, ‘Special Priority Enterprise’, ‘Technological Enterprise’ or ‘Special Technological Enterprise’ status. The law sets diferent tax beneft rates for enterprises in Israel’s periphery compared to Israel’s center. The sub-sections below describe the tax benefts for enterprises located in Tel Aviv and central Israel, their eligibility criteria and approval processes.
1. Technological Enterprise-
This designation is granted mainly to companies performing R&D activities. For a company to receive this status, it must comply with certain conditions regarding the scale of the R&D activity of the enterprise (in the three years preceding the tax year, the activity’s expenses must either exceed 75 million NIS a year or be in a certain proportion to its sales) and also show certain scale and growth steadiness in terms of R&D employees, sales or funding. Alternately, the company may apply for the Innovation Authority’s approval for Technological Enterprise designation. In addition to the above conditions, the company must export more than 25% of its annual sales turnover and, if it belongs to a parent group, the total income of its parent group in the tax year must not exceed 10 billion NIS ($2.75 billion).
2. Special Technological Enterprise-
This designation is reserved for large technological enterprises. Therefore, the eligibility criteria are identical to the Technological Enterprise designation, with one diference: the total income of the company’s parent group must be 10 billion NIS or more ($2.75 billion).
3. Priority Enterprise and Special Priority Enterprise-
This designation is granted mainly to companies which engage in manufacturing. In some cases, the company’s R&D activity may be considered a form of manufacturing activity. Clause 20a of the Israeli Income Tax Ordinance allows companies to deduct research and development expenses in the year they were paid from their current income. To make this deduction, companies must receive the Innovation Authority’s agreement that the expenses are research and development expenses.
The Angel's Law
This law provides tax benefts to single investors who invest in Israeli companies during their initial R&D stage (seed). The goal of the law is to increase the availability of fnancing sources for Israeli early-phase R&D-intensive companies. Investors who buy shares of startup companies, during their initial R&D stage, will be able to deduct the amount invested against each source of income at the time of the investment. Investors enjoy a de facto double beneft, both in terms of the timing of the recognition of the expense and in terms of the tax rate applied to the income against which the expense is deducted (marginal tax up to 48% instead of 25% - 30% on capital gains).
Employment Aid Programs
The Israeli Ministry of Economy operates several aid programs intended to encourage the integration of workers from diferent populations and regions into the workforce. The aid is given in the form of wage subsidies for new employees for a specifc period of up to several years (depending on the specifc program). Subsidy rates may range from 10% up to 40% and difer in relation to the employee’s background (students, workers from minority groups), and to the amount of time the employee has been already working in the position.
The diferent aid programs are facilitated by the Authority of Investments and Development of Industry and Economy in the Ministry of Economy.
R&D Grant Programs
The Innovation Authority designs and operates over 40 R&D grant programs for multinational companies, individual entrepreneurs, research institutions and NGOs, which further support Israeli R&D. The programs ofer a unique, customized and comprehensive incentive “toolbox,” such as the Innovation Labs programs, which ofer up to a 50% deduction in R&D expenses for specifc subsectors.
For additional information on available incentive programs,
Invest in Israel - investinisrael.gov.il
Israel Innovation Authority - innovationisrael.org.il/en/
Lower Municipal Tax Rates for Software Companies- Specifically in Tel Aviv
The Tel Aviv-Yafo Municipality is committed to supporting local innovation and offers up to a 50% reduction on property tax, according to the percentage of the R&D component of the company and regardless of the municipal tax zone the company is located in. Companies may apply online on the website of the Tel Aviv-Yafo municipality.