What is a Preferred Factory?
The Law for the Encouragement of Capital Investments
The Capital Investment Encouragement Law promotes investments in Israeli industries, encourages innovations, supports local manufacturing, and boosts investment in businesses in peripheral areas. It's overseen by the Investment Authority.
Definition of Preferred Factory
A Preferred factory in Israel is a factory that meets certain criteria outlined in the Capital Investment Encouragement Law and qualifies for tax benefits. These benefits include paying only 16% corporate tax instead of the usual 23%. If the factory operates in Development Area A, as defined by the law, it pays only 7.5% corporate tax.
What are the requirements for a company to qualify as a Preferred Factory?
For a company to be classified as a "Preferred Company," it must be based in Israel, incorporated there, and have its business operations and management controlled within the country. Additionally, it must meet the following conditions:
Preferred technology factory
In 2017, the Capital Investment Encouragement Law introduced a new tax benefit route called "Preferred Technological factory." Its goal is to boost research and development in Israel and attract technological innovation to the country. Preferred Technological factories enjoy greater tax benefits than regular Preferred factories, but qualifying for these benefits is more challenging. Within this program, a Preferred Technological factory pays only 12% corporate tax, and if it operates in Development Area A as defined by the law, it will pay only 7.5% corporate tax.
What are the requirements to be considered a Preferred Technological Factory?
The eligibility requirements for a Preferred Technological Factory are the same as those for a regular Preferred Factory. Additionally, the factory must fulfill all conditions stated in paragraphs 1 and 2 below or the condition specified in paragraph 3 below, along with the conditions outlined in paragraphs 4 and 5 below:
- Research and development costs: Over the previous three years prior to the tax year, the factory's research and development expenses averaged at least 7% of the company's total income each year.
- In a company that owns the factory, one or more of these happened:
A - 20% or more of its employees are in research and development roles.
B - As defined in the first amendment to the Securities Law of 1968, a venture capital fund invests at least 8 million new shekels in a company, and the company does not change its business focus after this investment.
C - Its income in the three years before the tax year rose by 25% or more on average compared to the year before, as long as the company's turnover in the tax year and each of the three preceding years was 10 million new shekels or more.
D - The number of employees in the three years prior to the tax year grew by 25% or more on average compared to the previous year, as long as the company employed at least 50 people in the tax year and each of the three preceding years.
OR
3. Conditions determined by the Chief Scientist at the Ministry of Economy and Industry, in consultation with the Director General of the Ministry of Finance and approved by the Minister of Finance, confirm its status as an innovative factory. This includes differentiating it from industrial factories producing goods using advanced technologies with the help of an intangible asset, and approval from the National Authority for Technological Innovation.
Additionally,
4. The total income in the tax year is less than 10 billion new shekels.
5. The factory was in a competitive market
*** A factory meeting the above criteria except for clause 4 will be classified as a Special Preferred Technological Plant.
Tax benefits as a Preferred factory - Shtainmetz Aminoach and Co. CPA
At Shtainmetz Aminoach and Co., we know a lot about Preferred Factories. We understand the laws and options for companies in Israel. Over the years, we've seen companies miss out on big tax savings because they didn't know about the benefits available to them. There are tests to be done to make sure you don't lose out.
Get in touch with the experts at Shtainmetz Aminoach and Co. CPA for consultation
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