International venture capital funds with offices in Israel may in future pay lower income taxes. According to a decree issued yesterday by the Israeli Tax Authority, these funds can now pay an income tax based on capital gains, instead of a fixed rate of 10% -15%.
The new legislation should encourage foreign investors to consider investments in Israel, according to Oz Halabi, member of the New York branch of the Israeli law firm Pearl Cohen Zedek Latzer Baratz, interviewed on Wednesday by Calcalist. In recent days, the law firm has received requests from numerous funds to understand the implications of the new law, Halabi said.
According to current Israeli government tax guidelines, a 30% income tax on national funds applies today, but non-Israeli investors and venture capital funds are exempt from local taxes. However, when a foreign fund opens an Israeli office, local laws provide unclear indications that this fund should be taxed as a national fund on its capital gains generated in Israel, with a fixed rate of 10% -15%.
Non-Israeli funds with more than ten partners are more likely to obtain an exemption, even with local representation, since a large investor base means that income gains are more easily recognized as passive income. Funds with ten or less partners are usually taxed according to the fixed rate of the country of origin.

The lack of clarity around local taxation means that non-Israeli funds operating on Israeli territory that are taxed at the fixed rate can not file tax returns in their country of origin, if the agreement is not recognized within a bi-national tax agreement, Mr. Halabi explained.
According to the new legislation, these funds will now be taxed as national, but only their expenses related to the presence in the country will be subject to tax.
The new guidelines are ‘another positive step’ to alleviate the tax burden on foreign investors and will allow these investors to operate in Israel through local representation in a more fluid way, said Halabi.


Source: medNews