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Israeli Knesset Approves 'Trapped Profit' Law

by Lorys Charalambous,, Cyprus

15 November 2012

Israel’s Knesset has passed a law that will reduce the amount of tax payable by multinational companies seeking to distribute dividends or invest profits abroad, in return for these companies investing at least 50% of their profits in the country.

Under the old Law for the Encouragement of Capital Investment, qualifying industrial companies' profits were not taxable until distributed as dividends. However, this led to large scale profit retention by these companies. The government has therefore proposed a one year lowering of the tax rate on profit distributions made by such multinationals.

The ‘trapped profits’ law, approved by the Knesset in its second and third readings on November 5, will lower the amount payable by multinationals by 40% to 60%, depending on how much the company is willing to invest in Israel. However, the tax rate of a company benefiting from the trapped profits law cannot fall below 6%.

The law specifies that the company must invest in "industrial enterprise, in assets used by the enterprise, in R&D or in the salaries of new employees" and that tax benefits will only be available if the company commits to reinvest at least half of the freed profits in Israel. The proposals will also change the tax treatment of dividend distributions from such profits in the hands of the recipient.

TAGS: tax | business | tax incentives | law | employees | corporation tax | Israel | manufacturing | multinationals | legislation | dividends

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