(Communicated by the Prime Minister’s Media Adviser)

A joint team from the Prime Minister’s Office, the Industry, Trade and Employment Ministry, and the Finance Ministry’s budget and tax divisions last night (Sunday), 5 September 2004, reached agreement on the principles for reforming the Encouragement of Capital Investments Law (see below for details).

The reform is expected to greatly advance capital investments in Israeli industry, via three tracks:

The first track is for investments in multi-national companies.  The state will grant benefits – including full exemption from corporate tax – to multinational companies that invest in periphery areas.

The second track is the “Irish” track.  The state will match the package of benefits given to companies in Europe in order to enable the State of Israel to participate in global competition.  Among the benefits on this track is a proposal for a corporate tax of 10% only.  The joint team will – in the near future – decide the issue of dividend taxes on foreign companies.

The third proposed track is for Israeli companies and entails maintaining the existing tracks for a range of possibilities.

It should be pointed out that the Government is promoting this reform with the objective of increasing capital investments in Israel, creating new jobs and developing the periphery areas.

Reform of the Encouragement of Capital Investments Law

In continuation of Government decision #1832 from 4 April 2004 regarding reform of the Encouragement of Capital Investments Law, it has been agreed to act towards formulating an amendment to the Encouragement of Capital Investments Law according to the following principles:

1. The documents on the gaps between the Ministry of Industry, Trade and Employment and the Ministry of Finance, which were prepared by the ministries before the 11 August 2004 discussion at the Prime Minister’s Office, include a closed and final list of the issues of disagreement under discussion.

2. The definition of “new factory” in which the owner of its shares is connected to another factory will include criteria which determine that this definition includes factories that produce “new products”, with “new technology,” “new production sites” and “new employees.”  To this end, employees will be considered new when 80% of them are.

3. The “minimum eligible investment” will be either NIS 400,000 or 20% of the discounted productive assets, whichever is higher.  The Finance and Industry, Trade and employment ministers will be authorized to change this rate with the approval of the Knesset Finance Committee.

4. Investment plans for the construction of industrial structures for rent will be on the grants track only.

5. The cooling off period between investments on the alternative track will be three years; the aforementioned ministers will be authorized to reduce the cooling off period to two years, with the approval of the Knesset Finance Committee.

6. Transitional directives for approved investment plans, which the current law allows to be increased (price increases, supplements in the context of final status reports that are neither expansion nor establishment), will be determined.

7. A six-to-ten-year transition mechanism for investment plans that have been partially approved, due to budgetary restrictions, from 1 January 2004 until 11 August 2004 and which meet the criteria of the amended law, in a manner that will enable full approval of the sought after investment in these plans on the alternative track, will be determined.

8. No benefits will be given on the alternative track for equipment which has been previously used in Israel.  Moreover, in the event that used equipment, for which grants had been received, is purchased, the four-year cooling off period between the grants track and the alternative track will begin.

9. The eligibility committee will be composed of four people and will be chaired by a retired district court judge who will be appointed by the Justice Minister following consultations with ministers, with the approval of the President of the Supreme Court.  The other members will be the directors-general of the Industry, Trade and Employment, and Finance ministries, or whomever else from among the ministries’ employees who may be appointed, and a public representative who will be appointed by the ministers, with the approval of the Attorney General.  The committee will discuss the definitions of “industrial enterprise”, “new product,” “production site,” and, “new technology.”  The committee will determine its own work procedures, with the approval of the Industry, Trade and Employment, and Finance ministry legal advisers or, in the absence of agreement between the two, with the approval of the Attorney General.  To the extent that during the legislative and amendment process, it is found that there are additional eligibility issues that are not given to clarification by means of legislation, the main legislation will expand the authority of the eligibility committee accordingly.  This article will require the approval of the Attorney General.

The Justice Ministry will be responsible for the operation of the committee.

10. The issue of dividend taxes on the Irish track will be discussed and decided by the joint team while considering the aspects of the simplicity and uniformity of the tax system and competitiveness vis-a-vis tax rates in Europe.

11. It will be determined that export terms will be calculated on the basis of additional sales stemming from the investment plan.

12. The legislative changes will be included in the framework of the 2005 Economic Arrangements Law.