Dr. Avi Nov, Adv.
Section 97(b1) of the Israeli Income Tax Ordinance provides that a foreign resident, who sells shares in a corporation which was at the time of the allotment domiciled in Israel and is an "R&D intensive corporation", shall be exempt from Israeli Capital Gains Tax. See also: Exemption from Israeli Capital Gains Tax.
The definition of the phrase "research and development intensive company" is contained in the Income Tax Regulations (Structural change of research and development intensive companies) 5754-1994.
These Regulations provide, as follows:
"research and development intensive company" – an Israel resident company for which all the following hold true:
(1) its main activity, since the day of its foundation, and if it was founded longer than two years before the structural change during the two years before the structural change – was research and development activity (hereafter: period before the structural change;
(2) its main activity during at least two years after the structural is research and development activity, or the use of products developed by the research and development which it carried out, or the marketing of aforesaid products;
(3) during the periods said in paragraphs (1) and (2) (hereafter: research and development period) all the companies assets were used – directly or indirectly – for the research and development activity, or were intended to be used for said activity or for use with the results of research and development activity carried out during the period before the structural change;
(4) at least 75% of the research and development expenditures expended by the company during the research and development period were expended in Israel, or a lower proportion set by the Commissioner in consultation with the Chief Scientist, within its meaning in the Encouragement of Industrial Research and Development Law 5744-1984 (hereafter: R&D Law), if expenditures were incurred for clinical and toxological tests that cannot be carried out in Israel;
(5) the company did not have any real estate rights or real estate association rights during at least two years after the date of the structural change, except for aforesaid rights in real estate used for research and development, it being impossible to carry out the research and development without the use of those rights;
(6) the Commissioner has certified that the company meets these conditions;
(7) the consideration for the issue of rights in the company and also in the company to which rights in the company are transferred (both hereafter: research companies), as the case may be, made during two years after the date of the structural change, are used for investment in research and development; for this purpose, expenditures by the company for the marketing of products developed by research and development carried out by it – in an amount that shall not exceed 75% of the consideration of the issue – shall be deemed investments in research and development, on condition that the said amount of expenditure or the total of the company's liable income in the year of the issue and during the following two tax years – whichever is the smaller amount – be invested in research and development before the end of the third tax year after the year of the issue, and the income derived by a controlling member, as defined in section 3(i) of the Ordinance, shall also be deemed the company's liable income;
"research and development", "research" or "development" – as defined in the R&D Law, as well as transitional stages to production and marketing by the company, in respect of products which were developed by research and development carried out by it, all when the State or a body on its behalf participate in financing the research by means of a grant, as defined in section 20A of the Ordinance, or when the Chief Scientist certified that the research and the development are as defined in the R&D Law;
"research and development expenditures" – the total of expenditures incurred for research and development, both in Israel and abroad;
"investment in research and development" – research and development expenditures, including investment of the consideration from the issue in an Israel currency or foreign currency deposit or in bonds of the State of Israel, if all the following hold true:
(1) it was made immediately after the consideration was received;
(2) all of it is in one deposit;
(3) as long as it was in the deposit, no activity was carried out with the investment, except for the withdrawal of monies used immediately after their withdrawal for research and development expenditures;
(4) the deposit is in the name of one of the research companies, includes all profits from the investment and is held by an authorized dealer, within its meaning in the Currency Control Law 5738-1978, or by a banking corporation within its meaning in the Banking (Licensing) Law 5741-1981, or by a foreign banking corporation, on condition that the deposit there received advance approval from the Commissioner, and on condition that – within 30 days after the deposit was made – notice thereof was delivered to the Assessing Officer with whom the company's file is kept, specifying the date on which the consideration for the issue was received, the date of the deposit, the number of the deposit and where it is kept; for this purpose, "foreign banking corporation" – a banking corporation in one of the countries enumerated in Schedule One of the Currency Control Permit 5738-1978;
(5) the entire amount of the deposit and all profits accrued on it will be used for research and development within four years after the rights were issued.
Dr. Avi Nov Law Offices, Israeli & international tax law
*This article is intended for informative purposes only and is in no way to be construed as tax advice or a legal opinion