Capital Investment Encouragement Law (1959)

📅 Please note: Information is current as of the publication date. Tax laws and regulations may change; verify the current state with a CPA before taking action.

Category: Capital Investment Encouragement | Reading time: approx. 8 minutes

The Capital Investment Encouragement Law, 5719-1959, is one of the oldest and most central laws in the Israeli tax system. It was enacted in the 1950s to encourage capital investment in industry — both domestic and foreign — and in recent decades has undergone several deep reforms expanding it into additional sectors such as hi-tech and institutional rental. The law provides a broad package of tax benefits for enterprises that meet its conditions and can save businesses millions of shekels per year.

Aims of the Law

Encouraging capital investment in Israel — domestic and foreign.
Increasing exports and manufacturing in Israel.
Developing national-priority areas — periphery and preferred regions.
Promoting key sectors — hi-tech, biotech, rental.
Creating quality jobs.

Structure of the Law — Main Tracks

The law is composed of different chapters, each providing a unique benefit track:

1. Preferred Enterprise (Chapter 7)

An industrial company or preferred industrial company is entitled to reduced corporate tax:

Priority Area A (Galilee, Negev, parts of Jerusalem): tax of 7.5%.
Rest of Israel: tax of 16%.
Dividend tax: only 20% (instead of 30%–33%).

Conditions: 25% of the company's revenue from export sales; substantive industrial activity; investment in tangible assets.

2. Preferred Technology Enterprise (Chapter 7A)

Enacted under the 2017 reform to align with the hi-tech world:

Corporate tax: 12% on technology income.
Dividend tax: only 4% for foreign institutional investors.
Royalty exemption on IP under certain conditions.

Threshold conditions include revenue volume, R&D investment, and the proportion of research employees.

3. Special Preferred Technology Enterprise

For large multinationals (over ILS 10 billion revenue):

Corporate tax: only 6%.
Dividend tax: 4%.

4. Institutional Rental (older Chapter 7A / dedicated section)

For long-term residential rental projects: reduced tax on rental income, accelerated depreciation, and more. (Detailed in a separate article.)

5. Capital Investment Tracks

Financing assistance for capital investments — grants from the Investments Authority, state-guaranteed loans, and exemptions on capital investment in qualifying assets.

How Do You Apply for the Benefits?

Identify the appropriate track — based on the company's activity and size.
File an application with the Investments Authority or the Investment Center (depending on track).
Present a business plan — forecasts, investments, jobs.
Obtain approval — a letter of allocation with terms.
Ongoing reporting — annual return with a dedicated appendix to the Tax Authority.
Maintain eligibility conditions throughout the benefit period (typically 10 years).

Common Mistakes in Applying the Law

Lack of proper documentation separating preferred income from regular income.
Selling preferred assets before the end of the eligibility period — retroactive tax liability.
Activity changes removing the company from the benefits scope without proper reporting.
Failure to meet the required export target (25%).
Failure to make proper use of parallel grants from the Investments Authority.

Impact of Future Reforms

The law undergoes frequent reforms driven by:

OECD Pillar 2 — the global minimum tax requirement of 15% may change the reduced rates for very large corporations.
Internal policy shifts — discussions to expand to additional sectors.
Court rulings — ongoing clarifications of threshold conditions.

💡 Recommendation from the Firm

The Capital Investment Encouragement Law is a powerful tax tool, but managing benefit tracks correctly requires high expertise and ongoing relations with both the Investments Authority and the Tax Authority. At our firm, the specialists in this area are CPA Hanoch Hager (international tax and industry) and CPA Amir Gonen (hi-tech and technology enterprises). We accompany companies from the first application through ongoing reporting and ensure our clients leverage the law to its fullest.

Summary

The Capital Investment Encouragement Law is a central tax infrastructure of the State of Israel — relevant to companies of every size across diverse sectors: traditional industry, hi-tech, real estate, biotech, and more. Proper use of the law is not only a tax saving — it is a significant competitive advantage. If your company is active in one of these sectors, a consultation with a CPA who specializes in the Encouragement Law is a necessary step.