Israel's high-tech sector faces setback as key benefits removed from budget bill
Foreign investor incentives and multinational tax reforms pushed to lengthy legislative process amid growing uncertainty.
The Ministry of Finance removed on Friday all provisions related to high-tech industry benefits from the Arrangements Law, Calcalist has learned. These provisions include laws concerning the exemption of capital gains tax for foreign investors, the taxation of multinational companies, and minor changes in mergers and acquisitions regulations.
Removing these sections from the Arrangements Law halts their approval and moves them to the standard legislative process, which typically takes much longer. However, the Ministry of Finance has indicated that they plan to have the benefits approved by the time the budget is passed in March 2025.
The Arrangements Law is a government-sponsored bill presented to the Knesset alongside the State Budget Law and incorporates government bills and legislative amendments.
Currently, most countries exempt foreign investors from capital gains tax, while in Israel, the exemption is contingent on the foreign investor not having a "permanent establishment" in the country. The ambiguity surrounding the definition and criteria of a "permanent establishment" creates uncertainty for investors, exposing them to potential tax liabilities. This is particularly problematic for investors in venture capital funds, the majority of which are financed by institutional foreign investors, primarily from the U.S. The new law was intended to provide clarity to foreign investors regarding this tax exemption.
The taxation of foreign companies is another complex issue. International corporations such as Meta and Google lack certainty regarding how they will be taxed in Israel and are required to engage in advance negotiations with the tax authority. This bureaucratic process is lengthy and complicated, delaying their tax assessments. The section that was removed from the Arrangements Law was supposed to address this uncertainty.
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The office of Finance Minister Bezalel Smotrich stated: "Minister Smotrich views the high-tech industry as a critical pillar of Israel's economy. Under his leadership, significant resources and substantial budgets have been allocated to the high-tech sector, even in the context of the war budget, where consolidation measures required expense reductions. The minister’s policy will continue in the upcoming budget, with investments in high-tech budgets and incentives. Unfortunately, due to scheduling constraints, the Ministry of Justice has delayed these efforts, but we intend to push forward with these laws to ensure their approval along with the state budget."
The High-Tech Forum for Israel commented: "At a crucial time for rebuilding foreign investor confidence and fostering conditions to encourage high-tech investments, the Finance Minister is undermining incentives for investors and international companies, weakening the Israeli economy. Once again, the Finance Minister is acting against economic logic, demonstrating a lack of understanding of the rules of the investment world. Undermining the high-tech industry, which contributes more than 50% of Israel's exports and over a third of its tax revenues, is a direct attack on the Israeli economy and the nation's security."
