Dr. Avi Nov, Adv.
The Israeli Knesset Finance Committee passed recently the trapped profits tax bill for its second and third readings by the Knesset. The new tax bill grants tax break to large multinational companies operating in Israel. Israeli companies that benefit from the Encouragement of Capital Investments Law would receive reductions of 40% to 70% on corporate taxes on so-called restricted profits, which are profits the firms have earned in Israel that must remain here, unless they pay higher taxes on the money.
New Tax Breaks
If the plan is approved by the Knesset, the Israel Tax Authority will offer reduced taxes if the money is paid by the end of 2013. The Israeli Treasury intends to use the money to cover the budget deficit.
The firms in Israel that are likely to utilize the tax breaks are multinationals like Intel, Teva and Israel Chemicals. These firms have accepted state aid under the Encouragement of Capital Investments Law, which has entitled such firm state aid and tax grants over the years.
Under the current law, companies are generally required to pay 10% corporate income tax. In the case they repatriate profit overseas as dividends, they are required to pay additional tax of 15%. This tax burden discourages companies to repatriate their profits to their overseas' shareholders. Thus, the profits are trapped within the companies. It is estimated by the Israeli treasury that the total value of the trapped profits may be some NIS 120 billion.
The new bill grants a tax break of 40% to70% for companies that wish to pay a tax on their profits. The tax rate will be 6% to 17.5%, instead of the 10% to 25% set in the current version of the Law for the Encouragement of Capital Investment.
The companies receiving the tax benefit will need to invest half of their trapped profits in Israel in one of three ways:
· In productive assets at plants;
· Research and Development;
· Hiring new employees at the same plant.
The Israeli Tax Authority has issued tax assessments concerning Teva Pharmaceutical Industries Ltd. (NYSE: TEVA; TASE: TEVA) and Check Point Software Technologies Ltd. (Nasdaq: CHKP). The Israeli Tax Authority demanded NIS 1.4 billion in taxes from Check Point on income from its Singapore subsidiary in 2002-05. The Israeli Tax Authority also negotiated with Teva on a NIS 2.7 billion tax assessment for its acquisition of Ivax in 2005.