Finance Minister Silvan Shalom announced last month that foreign investors would be exempted from paying taxes on investment in Israeli venture capital funds.
The tax exemption, which took effect immediately and will continue through Jan. 1, 2004, comes against the background of a growing flight of foreign investment from Israel’s high-tech sector.
“This is a very difficult period for our economy, especially in light of the recent terrorist attacks on the U.S., causing a real danger of collapse for U.S. and European capital markets, especially of high-tech related industries,” Shalom told journalists at a news conference in Jerusalem.
According to Shalom, the decision to enact a full tax exemption came after a meeting with U.S. Ambassador Dan Kurtzer, and a realization that current negotiations between the Israeli Tax Authorities and the U.S. Internal Revenue Service over taxation of foreign residents in Israel will take longer than expected.
In the past, foreign investors have threatened to stop investing in Israeli startups until the law was changed.
For example, a dispute between the tax authorities and owners of venture capital fund Jerusalem Venture Partners over the taxation of profits made by the sale of U.S.-registered Chromatis, which was purchased by Lucent Technologies for about $4.5 billion and has since ceased operations, has prevented investors from exercising their stake before Lucent shares plunged.
“When high-tech is hit in such a way, it does not help our economy to grow and flourish,” Shalom said. “We must do everything in our power to remove the Israeli economy from its current downturn.”
Yoni Kaplan, Tax Authority chief, said foreign residents wishing to enjoy the tax exemption will be required to receive a pre-ruling by the Tax Authority, thus preventing Israeli citizens from enjoying the tax break.
Responding to the new measure, Challenge Fund president Joseph Ciechanover praised the decision and said it was an important development.
“The Finance Minister made a wise move, but its influence will not be seen in the short term,” said the former chairman of Israel Discount Bank and El Al Israel Airlines. Ciechanover pointed to the security situation both in Israel and around the world as the forces that will guide investment.