Law tax

Important changes to the Capital Investment Promotion Act – Tax authorities

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The Capital Investment Encouragement Act, 57191959- (hereinafter: the “Right”) is designed to encourage investment in Israeli industry and its legislation has a dual purpose: first, to promote Israel over other countries by granting tax incentives; second – to encourage business retention in the Israeli periphery.

In recent years, several amendments have been made to the law (mainly amendments 68 and 73), which have introduced a comprehensive reform of the way in which the benefits included in the law can be used.

As we will see in this article, the main objective of said amendments was to encourage manufacturers and industrialists, both local and foreign, to set up factories in Israel rather than abroad, a global trend of many countries. which has become widespread lately. the world, especially since the beginning of the presidency of Donald Trump, which seeks to encourage many American companies to return and reopen production plants in the United States.


As stated above, the purpose of the law is dual purpose; both to promote Israel in “tax competition” with other countries and to encourage business in Israel’s peripheral areas.

The law and the regulations put in place by virtue of it, in fact determine two types of incentives1:

  1. Incentives whose main purpose is to increase economic growth, which aim to increase investment in the economy as a whole.

  2. Incentives whose main objective is the development of the periphery, such that they aim to influence the spread of industry throughout Israel and to increase activity and investment in the periphery.

The benefits included in the law are granted when establishing or expanding an industrial plant or tourist enterprise through two routes – the subsidy route and the tax benefit route.

Important changes to the law in recent years:

Two major amendments to the law have been approved in recent years, which significantly affect it. The first and most important is Amendment 68 of 2012, which we will expand on below. The second, which will not be discussed in this article, is Amendment 73 of 2017, which mainly concerns income from intangible assets. Incidentally, we will add that in recent days the Israeli tax authority has updated its policy to include the stipulations of the law also on startups.

Until Amendment 68, the law focused on attracting capital to Israel and encouraging economic initiatives and investment of foreign and local capital, among other things, in order to develop the production capacity of the country’s economy, improve the country’s balance of payments and absorb immigrants. In Amendment 68 to the law, it was decided to provide a more comprehensive and appropriate response to the economic challenges facing the Israeli economy in general, and the industrial sector in particular. Therefore, the purpose of the law has been changed to emphasize innovation and activity in development areas, to develop the productive capacity of the economy, to improve the competitiveness of the sector businesses in international markets and to create more jobs.

The Amendment changed both the tax benefits component and the subsidy component. For example, within the framework of the subsidies channel, the mechanism concerning subsidies in industry has also been extended to investments in non-physical capital, with the aim of extending the mechanism to other areas likely to develop the industry, such as worker training and development.

Under the tax benefits channel, prior to the amendment, the law established a complex benefits mechanism, which often created uncertainty among investors about the tax rates they had to pay in practice, and could therefore significantly harming Israel’s ability to attract investment in the industry. Under Amendment 68, a significant change was made to Article 51 of the Act, adding the marks B1 and B2 to Chapter VII of the Act, under which the tax benefit mechanisms for a “company company” which owns a “preferred company” factory” have been established, as well as tax benefit mechanisms for a “preferred company” which owns a “special preferred factory”.

Specifically, it will be briefly noted that a “preferred company” (a company incorporated in Israel, which is not wholly state-owned and which fulfills a number of cumulative conditions provided for by law), which has a ” preferred factory” (an industrial factory that meets the conditions of a “competitive factory” that are listed in Section 81A of the law) and has a “preferred income” (income derived from the Israeli activity of the factory preferred) will be entitled to a preferential tax rate on the
total preferred income from the preferred plant. Therefore, from 2015, favored factories could benefit from a reduced tax rate of 6% in development A zones (as defined in the second addition to the law) and 12% in zones that are not development A areas. These tax rates are much lower than those prevailing before Amendment 68.

In addition, Amendment 68 provided additional tax advantages, among others for “special privileged factories” (as defined by law), in the distribution of dividends and through accelerated depreciation.

As described below, the objectives of the new law are in line with the trend that has prevailed around the world in recent years, as can be seen in the US economy.

Amendments to the law in light of the prevailing global trend:

As indicated above, the change in the objectives of the law has been such that emphasis has been placed on developing the productive capacity of the economy, improving the competitiveness of the business sector in international markets and the creation of more jobs. The common denominator of these objectives is in fact to strengthen local production rather than production in foreign countries considered cheaper for such an activity (such as China, Turkey, etc.).

This trend is not unique to the Israeli economy, but is becoming increasingly common in other countries around the world. For example, in the United States, President Trump is trying to create jobs and boost local production by imposing taxes on goods imported from China. Contrary to the approach taken in Israel, namely the granting of tax advantages and subsidies to encourage production and reduce costs, in the United States, given the difficulty of making production considerably cheaper and affordable, Trump has chosen to impose restrictions (in the form of taxes) that will make production in other countries more expensive. It may not be the same method, but the end goal is the same: to encourage local production industry and create new workplaces.


Thus, in recent years, it is more advantageous for local industrialists and manufacturers to benefit from the advantages and subsidies granted by the capital investment encouragement law, and to set up their factories in Israel. By exploiting the mechanisms established by law, manufacturers have the potential to increase their profits while making a significant contribution to the productive capacity of the Israeli economy, improving the competitiveness of the business sector in international markets and creating jobs in the periphery. It’s a win-win situation in all aspects.


1. Income Tax Notification no. 3/2012 of the ISA, of 10.6.2012.

Originally published October 2018

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.