Israeli Tax Authority Negates VCT Tax Breaks

by Lorys Charalambous, Tax-news.com, Cyprus

04 January 2002

Just two months after Israel's Income Tax Authority gathered in numerous bouquets by agreeing to extend tax exemptions on Venture Capital Trusts, previously available only to foreign investors, to domestic investors, the Authority is setting about clawing back the lost revenue: by denying the exemptions to foreigners!

The local branch of the International Fiscal Association wrote yesterday to Finance Minister Silvan Shalom, saying that the Income Tax Authority is imposing numerous restrictions on tax exemptions to foreign investors in venture capital funds. The signatories were Dr. Avi Alter, chairman of the Association's scientific committee and former legal counsel to the Income Tax Authority, and Zvi (Daniel) Altman, chairman of the ad hoc committee on venture capital fund taxation.

They claim the order leaves many local companies in an inferior position for recruiting investors vis-a-vis US technology companies. They said that the US exempts foreign investors in technology companies without restrictions or limitations, "while Israel often creates a tax obligation."

Alter and Altman's main points are:

• Granting a tax exemption is contingent on the funds meeting a series of conditions and on a pre-ruling vis-a- vis the Income Tax Authority. Funds that do not meet these conditions will be subject to tax, which means that Israel will not meet its obligations toward the US and other countries.
• A conditional tax exemption will seriously affect the competitiveness of local hi-tech companies. "Foreign investors will prefer not to take the risk, and will invest in places with a certain tax exemption, not subject to conditions," especially when the demand for investment exceeds the supply.
• Veteran funds are discriminated against, as they will receive only a partial exemption on income deposited after September 24, 2001 (the date Shalom announced the exemption). Double taxation, which was one of the reasons for the exemption, has not been solved for these funds. The agreement between the Income Tax Authority and the Israel Venture Association applies to funds that have a permanent base here, but does not deal with taxation of funds that do not. Alter and Altman say such funds should also be tax exempt.

The letter concludes with a request that Shalom grant a full and unconditional tax exemption for all foreign investors in venture capital funds. "If a foreign investor wants to invest even $100,000 in an Israeli company, why should he be blocked?" they ask.

The announcement that local investors could share in the tax breaks was made in October by Prime Minister Ariel Sharon, speaking to executives at the Israeli European Business Forum. He may not be too pleased to see his initiative being compromised in this way by the zealots at the Income Tax Authority.

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