Israel offers a variety of well-developed investment incentive programs, including the Approved Enterprise Scheme under the Encouragement of Capital Investments Law, free trade zones and research and development grants from governmental and quasi-governmental sources.
Encouragement of Capital Investment LawThe government's primary statutory measure for encouraging both domestic and foreign capital investments is embodied in the Encouragement of Capital Investment Law of 1959. Under this law, the government grants substantial benefits in a variety of forms to "approved enterprises." The status of an "approved enterprise" may be granted to companies incorporated in Israel and to partnerships registered in Israel. Such enterprises generally engage in industry, shipping, export or tourism.
Applications for approval of enterprises are filed with the Investment Center of the Ministry of Industry and Trade and must be approved before any investment is made. The Investment Center may approve or reject proposals in full or in part. One of the conditions to receiving such a grant is that 30 percent of the total investment in the project must have been financed by the owners' investment in paid up share capital.
Approved enterprises may be entitled to receive grants, which vary in amount according to the geographic location of the enterprise in Israel and the nature of the enterprise. In the case of industrial enterprises, the grants may reach up to 24 percent of the total investment in fixed assets of the project.
Approved enterprises may also receive tax benefits, including reduced rates of corporate tax, the ability to use accelerated depreciation on fixed assets and a reduced withholding rate on dividends distributed to shareholders. For example, reduced corporate tax rates may be between 10 percent and 25 percent, depending on the proportion of foreign investment made in the project, in contrast to 36 percent, which is the usual corporate tax rate.
An approved enterprise may alternatively choose to waive its right to receive government grants and to receive, instead, tax exemptions, which may, if approved, include a full tax exemption of up to ten years. Furthermore, an approved industrial or tourist related enterprise might elect to apply for state guaranties of loans instead of grants. Dividends distributed by an approved enterprise will be subject to the equivalent of branch profits tax of between 10 percent to 25 percent depending upon the percentage of foreign shareholding of the enterprise, in addition to withholding tax of 15 percent.
Research and DevelopmentResearch and development grants and assistance programs are available through the Ministry of Industry and Trade. To attain such grants or assistance, which can provide as much as 66 percent of research and development costs, a proposal must be submitted by the entity conducting the research and development activity to the office of the Chief Scientist in the Ministry of Industry and Trade. If a research and development project results in a saleable product, the funding will generally be repaid as royalties at 3 percent of the product's sales revenues. The product developed as a result of such a grant must be produced in Israel, except if otherwise approved by the Research Committee of the Office of the Chief Scientist.
Similarly, up to 50 percent of industrial research and development costs of joint ventures between Israeli and US companies may be underwritten by the Binational Industrial Research and Development Foundation (BIRD), and funds for agricultural projects are available from the Bi-national Agricultural Research and Development Foundation (BARD), both of which are sponsored by the Israeli and United States governments.
Furthermore, the Canada-Israel Industrial Research and Development Foundation (CIIRDF) was established by the governments of Canada and Israel to promote collaborative research and development between companies in those two countries. CIIRDF will contribute up to 50 percent of the research and developments costs of joint feasibility studies, pilot projects or full-scale projects.
The United States, Israel and Jordan have recently initiated the TRIDE program, now in its pilot stages. Each TRIDE project is a joint venture involving private companies from all three countries, which will draw on complimentary strength in research and development, manufacturing, and marketing to develop new products and technologies for domestic and international markets. The three governments will support up to 50 percent of the direct costs needed to bring new product to market. The three governments have equally contributed a total of $2 million.
Israel is a member of the European Community's Fourth RTD Framework Program. The program funds research and technological developments and has a total budget of more than US$ 10 billion.
The Chief Scientist is also responsible for the Incubator Technology Centers which offer infrastructure support at reduced or no cost and finance 85 percent of the approved budget for technology based startup businesses. The Incubator Centers have been very successful in starting out several new tech that have gone on to become highly successful businesses.
Free Trade ZonesIn an attempt to maximize the advantages of investing in Israel, the government enacted legislation to allow the development of the free trade area in Eilat, which provides for a 20 year income tax reprieve and a 15 percent flat tax on distributed profits of an investing company. It affords full exemption from import and export duties and taxes, allows full repatriation of profits with the foreign investor corporation and lifts otherwise applicable currency controls.
Qualifying Industrial ZonePursuant to the United States - Israel Free Trade Area Implementation Act of 1995, the governments of Israel and Jordan agreed to the creation of the Irbid Qualifying Industrial Zone (QIZ). This zone is located in the Irbid duty-free zone in Jordan in conjunction with the Israeli side of the border-crossing at the Sheikh Hussein - Nahar Hayarden Bridge. On March 13, 1998, the Office of the United States' Trade Representative designated the first Jordan-Israel "qualified industrial zone" at the Al-Hassan Industrial Park in Irbid, Jordan. According to this special status, goods from the zone that are produced through Jordanian-Israeli commercial cooperation, and which meet certain minimal criteria, are eligible for duty-free entry into the United States. This initiative has already significantly increased Jordanian-Israeli dialogue on commercial issues and has generated notable private sector interest from both countries. More than $140 million worth of new projects have been set up at the Irbid QIZ in 1999. These new investments will bring to $350 million the aggregate value of projects in the zone, whereby most of these factories produce textiles and apparel. In 1998, the United States imported from the QIZ goods valued at approximately $17 million.2 (see Chapter on Jordan).
Trade AgreementsIsrael has had free trade agreements with the European Union (EU) since 1975, the United States since 1985 the European Free Trade Association (EFTA) since 1992, followed by agreements with Canada, Turkey, Hungary, Slovakia and the Czech Republic. Those agreements allow Israeli enterprises and Israeli-based enterprises to access freely foreign markets, which cover more than two-thirds of Israel's external trade.
Since the signing of the Declaration of Principles with the Palestinian Liberation Organization in 1993, Israel has signed a free trade agreement with the Palestinian Authority and began negotiations with a number of other Middle Eastern and other countries. So far, Israel has concluded agreements with Jordan, India, CIS, Russia, South Korea and Poland. Israel has had a most favored nation trade agreement with Egypt since 1981. Indonesia, Bangladesh and Pakistan have all indicated an interest in establishing closer economic ties with Israel. Morocco, which has established diplomatic relations with Israel, has increased its importation of Israeli-made agricultural related products such as agro-chemicals and irrigation equipment.
CustomsSince January 1998, Israel has implemented the Customs Valuation principles of the WTO code. Under the new regulations, the basis for valuation is the Transaction Value, in most cases the CIF price. Under the 1975 EU-Israel Free Trade Agreement, industrial products not produced in Israel may be imported into Israel free of any customs charge. Such products usually include raw materials and semi-processed goods.
In the case of raw materials imported for the purpose of producing products intended for export, it is usually possible to defer payment of import duties, provided that guaranties are made that such duties will be paid if the products are not exported within a given period of time.
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