Incentives and Benefits

A company that creates IP assets in Israel, or is willing to transfer some IP to Israel, is entitled to significant benefits. Benefits include reduced tax in the following areas: income corporate tax (6%, 7.5% – 12%), dividend tax (up to 4%) and capital gains/exit tax (6%,12% – over/under $2.5B global turnover).

The law sets different tax benefit rates for enterprises in Israel’s periphery compared to Israel’s center. The sub-sections below describe the tax benefits for enterprises located in Tel Aviv and central Israel, their eligibility criteria and approval processes.

This designation is granted mainly to companies performing R&D activities. For a company to receive this status, it must comply with certain conditions regarding the scale of the R&D activity of the enterprise (in the three years preceding the tax year, the activity’s expenses must either exceed 75 million NIS a year or be in a certain proportion to its sales) and also show certain scale and growth steadiness in terms of R&D employees, sales or funding. Alternately, the company may apply for the Innovation Authority’s approval for Technological Enterprise designation. In addition to the above conditions, the company must export more than 25% of its annual sales turnover and, if it belongs to a parent group, the total income of its parent group in the tax year must not exceed 10 billion NIS ($2.75 billion).

This designation is reserved for large technological enterprises. Therefore, the eligibility criteria are identical to the Technological Enterprise designation, with one difference: the total income of the company’s parent group must be 10 billion NIS or more ($2.75 billion).

This designation is granted mainly to companies which engage in manufacturing. In some cases, the company’s R&D activity may be considered a form of manufacturing activity. Clause 20a of the Israeli Income Tax Ordinance allows companies to deduct research and development expenses in the year they were paid from their current income. To make this deduction, companies must receive the Innovation Authority’s agreement that the expenses are research and development expenses.

This law provides tax benefits to single investors who invest in Israeli companies during their initial R&D stage (seed). The goal of the law is to increase the availability of financing sources for Israeli early-phase R&D-intensive companies. Investors who buy shares of startup companies, during their initial R&D stage, will be able to deduct the amount invested against each source of income at the time of the investment. Investors enjoy a de facto double benefit, both in terms of the timing of the recognition of the expense and in terms of the tax rate applied to the income against which the expense is deducted (marginal tax up to 48% instead of 25% – 30% on capital gains).

The Israeli Ministry of Economy operates several aid programs intended to encourage the integration of workers from different populations and regions into the workforce. The aid is given in the form of wage subsidies for new employees for a specific period of up to several years (depending on the specific program). Subsidy rates may range from 10% up to 40% and differ in relation to the employee’s background (students, workers from minority groups), and to the amount of time the employee has been already working in the position.

The different aid programs are facilitated by the Authority of Investments and Development of Industry and Economy in the Ministry of Economy.

The Innovation Authority designs and operates over 40 R&D grant programs for multinational companies, individual entrepreneurs, research institutions and NGOs, which further support Israeli R&D. The programs ofer a unique, customized and comprehensive incentive “toolbox,” such as the Innovation Labs programs, which ofer up to a 50% deduction in R&D expenses for specific sub sectors.