Israeli Tax Authorities Provide Certainty On Foreign Fund Investments

Author:Mrs Henriette Fuchs
Profession:Pearl Cohen Zedek Latzer Baratz
 
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The stake of foreign investment in Israeli high-tech reached 77% of total capital raised in 2018, and 30 new venture funds were born in 2018, raising a record $2.6 billion compared to 'only' $1.6 billion in 2017. In 2019, the Israeli tax authorities are chipping in 'a share', by releasing the revised rules for taxfavourable arrangements regarding foreign equity and venture funds.

For more than two decades, a tax exemption for gains by non-resident investors on shares in Israeli companies has been in effect. The expansion of this exemption, in 2009, did not alter the requirement the shares sold should not belong to a 'permanent establishment' in Israel and that Israeli situs real estate does not form the larger part of the company's asset value. The first requirement would threaten the exemption on investments though funds supervised by local fund or investment management; local professional involvement would risk qualification of a 'permanent establishment'. Against this backdrop, and while aware of the importance of foreign risk capital as 'oxygen' for Israel's industrial advancement, the Israel tax authorities would regularly provide terms for relief to investment funds, on a case by case basis, in accordance with the intentions of Sec 16A of Israel's Tax Ordinance (no double taxation for foreign investors no matter whether resident in a treaty country or not). When in 2014 the State Comptroller pointed out that the tax authorities might be exceeding their authority by the 'foreign funds ruling policy' the process of introspection resulted in publication of two new circulars mid2018.

In the guidelines for tax relief for 'venture capital funds' (2018/9 VCF) and for 'private equity funds' (2018/10 PEF), the Israeli tax authorities put in writing the terms for exemption from gains tax for foreign investments, relief from tax obligations on the fund itself and the tax position of the actual fund management, but in a new jacket.

A fund with an aggregate capital of $10 million, counting at least 10 unrelated limited partner investors (LPs), of whom none are connected to the general partner managing the fund (GP), each holding at the most 20% of the equity in the fund (one investor may hold up to 35%), while foreign investors must hold at least 30% of fund equity (and at least $5 million), can request for confirmation of the exemption from tax of its foreign LPs. The fund is managed by the GP and the limited partners do not participate in the...

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