Promoting Israeli innovation through lower taxes

Taxes may be inevitable, but innovation is not. Though increasingly essential, innovation still needs to be fostered and nurtured.

That is why Israel, renowned as the “Startup Nation,” continues to take bold and innovative steps to make sure that its economy remains competitive, and that its innovation ecosystem remains among the global leaders for the foreseeable future.

Indeed, it wasn’t by accident that Israel emerged as a tech powerhouse – rather, it was the result of deliberate policies enacted over the decades that culminated in Israel’s emergence as a global leader in entrepreneurship, innovation, research and development (R&D), advanced manufacturing and beyond. But, as other countries quickly catch on and are in the process – often with Israel’s help – of creating their own R&D infrastructure to stimulate and foster homegrown talent – one thing has become clear: Israel must not rest on its laurels. In a highly competitive global economy, staying in place is really akin to moving backwards.

The State of Israel has gone to great lengths to promote a pro-business environment with attractive government programs and services designed to address every phase of the investment process. The country’s robust, innovation-driven economy, together with the government’s comprehensive suite of incentive programs, position Israel as a uniquely attractive destination for foreign investors.

That is one of the key reasons that over 270 of the world’s largest multinational companies – including Intel, Microsoft, Apple, Google, IBM, Motorola, Siemens, GE, GM, Cisco and more – have established more than 320 R&D and advanced manufacturing facilities throughout the country. Strong economic performance (higher than the OECD average), a highly educated workforce, an innovative environment and vibrant high-tech ecosystem are just a few of the others. To continue building on this trend, successive Israeli governments have recognized the critical role the state plays in providing a supportive growth environment, starting with favorable investment incentives.

Enshrined into its legislation through laws designed to encourage economic growth, the State of Israel seeks to offer maximally supportive conditions for companies seeking to invest in the country. Among the numerous incentives initiated over the years are highly favorable tax structures, including reduced tax rates, tax exemptions and other tax-related benefits. Now, a decision has been taken by Israel’s ministries of Finance and Economy to drastically reduce Israel’s corporate tax structure for multinational companies investing in Israel in order to encourage more to set up shop in the country.

Spurred by the recent set of complex tax rules known as BEPS (Base Erosion & Profit Shifting) issued by the OECD, Israel is proposing a new set of tax cuts to encourage existing MNC’s to invest more, and for new global conglomerates to join our R&D hub. Here is a snapshot of the what has been termed the “Israeli Innovation Box” regime:

• A new corporate income tax rate of 6% with a 4% withholding tax rate on dividends for qualifying technology companies with consolidated revenues of over $2.5 billion
• To qualify, technology companies will need to invest at least 7% of income in R&D and one of the following 3 additional conditions should be met; (1) at least 20% of the workforce is employed in development; (2) the company previously received an investment from a venture capital firm, or; (3) average annual growth of 25% in sales or employees over three years

Companies that do not meet the last three criteria above can still qualify as per the discretion of the Israel Innovation Authority (formerly Office of the Chief Scientist).

In an effort to promote and raise awareness of this new innovative Israeli tax structure, Director General of the Israeli Ministry of Economy and Industry Amit Lang and I will be leading a delegation to the United States from November 30^th through December 7^th. The tour will include stops in Boston, Connecticut, New York, New Jersey and Philadelphia and will include meetings with CEO’s, corporate tax professionals and others who might be interested in hearing about opportunities to expand operations in Israel.

To paraphrase the Chairman of the Israel Innovation Authority Avi Hasson, for Israel, innovation is not a hobby, it is our key game plan. Innovation will remain at the forefront of what drives the Israeli economy forward and our government will continue to ensure that our vibrant R&D ecosystem continues to operate in a globally competitive environment. Taxes are a significant consideration for multinationals and Israel has recognized that the new OECD rules offer an incredible opportunity for growth. It’s time to Invest in Israel!