A series of measures aimed at bringing tax certainty to the tech industry is returning to the Arrangements Act, with a new draft set to be published on Sunday. This comes after the high-tech chapter was initially removed from the Arrangements Act due to pressure from the Ministry of Justice, which argued that it was technically impossible to prepare for the proposed changes.
Some in the tech industry speculate that the dismissal may be related to the justice minister’s intent to retaliate against the tech industry, which has been one of the main leaders of protests against judicial reform.
In the month since the high-tech chapter was removed from the draft, several meetings have been held between representatives of the Ministry of Finance and the Ministry of Justice to facilitate its return. The Treasury had considered pushing the change through regular legislation, but this would be a long process with uncertain success.
The main purpose of the proposed changes is to increase tax certainty for international companies and foreign investors operating in Israel. This high-tech chapter was originally part of the Arrangements Act and was developed through a collaborative effort involving the Treasury, the Tax Administration, the Chief Economist, the Budget Office and the Innovation Agency. Over the past six months, the team has met with leaders in the high-tech industry and held several “roundtable discussions” primarily focused on promoting foreign investment. The initiative notes that the ongoing war and judicial review are deterring many people from investing in Israel, as evidenced by a sharp decline in venture capital investment in 2023 and 2024. Proceeded on the basis of recognition.
The proposed measures aim to improve certainty in Israel’s tax environment, which is currently unfavorable, particularly in the context of mergers and acquisitions of local companies. “During the roundtable discussion, it became clear that the low level of tax certainty in Israel is holding back many companies and investors. and strengthen the business environment,” the draft chapter states. .
One of the proposed measures expands the scope of tax incentives, with the value ratio of the acquired company to the buyer up to 1:19, i.e. the value of the acquired company is at least 5% of the value of the buyer. It’s about trading. value. Previously, tax benefits were only granted to transactions with a ratio of 1:9. That is, the acquired company had to be at least 10% of the value of the buyer. This change is intended to make acquisitions of small and medium-sized enterprises more attractive for tax purposes, given the sharp decline in corporate valuations. The goal is to protect start-ups and smaller companies from closing by creating tax incentives for acquisitions.
Another important provision addresses reducing tax barriers to encourage foreign private investors to invest in local businesses. Currently, non-residents are exempt from capital gains tax only if their profits are not attributable to a “permanent establishment” they maintain in Israel. For example, if a non-resident invests in a fund that makes a profit, it will be subject to capital gains tax. Investors can apply for a one-time exemption from tax authorities based on prior rulings, but uncertainty remains about the final tax amount. The new proposals aim to grant permanent exemptions similar to those offered in most countries, providing greater clarity and confidence for investors.
Another important change is aimed at international companies operating in Israel, which employs about a quarter of Israel’s high-tech workforce at salaries above the industry average. Multinational corporations such as Microsoft, Google, Apple, Intel, and Amazon play an important role in developing future entrepreneurs, as many of their employees go on to work at startups. There are currently 515 such companies operating in Israel, employing 90,000 workers. These companies frequently compare the tax environments of different countries to assess the viability of their activities.
There is currently some uncertainty in Israel as there are multiple ways to tax international development centers. Global companies are wary of changes to the way they set prices that could require them to pay taxes on their global profits, not just their local activities. Currently, the tax amount is determined through a predetermination process with the tax authority. To reduce uncertainty, the tax authorities will issue an income tax circular within 60 days detailing a “green route” for companies whose main activities are outside Israel but maintain research and development centers in Israel. It is proposed to provide certainty for companies making investments or acquisitions. country.
This problem is not unique to Israel; there is global concern that large companies, especially software companies without production centers, are avoiding full tax liability simply by operating development centers in multiple countries.
