The Capital Investment Encouragement Law

What Is the Capital Investment Encouragement Law?

The Capital Investment Encouragement Law was enacted in its original form in 1959, with the aim of encouraging entrepreneurs to establish enterprises that would develop Israel's production capacity and increase exports, and of giving Israeli companies the means to compete in international markets. The law grants benefits in tax rates, with additional benefits for enterprises established in development areas.

Since then the law has undergone two major changes: in 2011 the "Preferred Enterprise" track was introduced, with reduced corporate tax rates, and in 2017 the "Preferred Technological Enterprise" tracks were added for R&D-intensive companies. This article presents the benefits in their current form.

Who Are the Benefits Intended For?

• Companies that develop software — including apps and games — and grant their customers a right to use the software they developed.
• Manufacturing companies that sell products they manufactured in their enterprise, including components manufactured for them in another enterprise.
• Companies that carry out industrial research and development for foreign residents, with the approval of the Innovation Authority.
• Tourist accommodation facilities, such as hotels, in which at least 25% of overnight stays — in the tax year, or on average over the tax year and the two preceding years — are by foreign residents.
• Residential rental buildings — today under the "institutional rental building" track, in which the apartments are let on a long-term basis.

The competitiveness condition. An industrial enterprise — including a software company — is entitled to the benefits only if it is a "competitive enterprise". As a rule, the condition is met when at least 25% of the enterprise's income from sales derives from a particular market of at least 14 million residents (a figure that is updated every year), or when income from sales in a single market does not exceed 75% of total income from sales. In practice, this usually means that a component of sales outside Israel is required. The condition has exceptions — for example for enterprises in biotechnology and nanotechnology, and for an enterprise that manufactures components for another eligible enterprise.

The Tax Rates and Benefits

Preferred Enterprise

• Corporate tax at a rate of 7.5% on the preferred income of an enterprise located in Development Area A, and 16% elsewhere in Israel — compared with corporate tax of 23% on the income of a regular company.
• Accelerated depreciation on productive assets used by the enterprise.
• Tax at a rate of 20% on a dividend sourced from preferred income — compared with 30% for a substantial shareholder in a regular company.

Preferred Technological Enterprise

The track, added to the law in 2017, is intended for companies whose income derives from intellectual property — such as software and patents — and from research and development in Israel:

• Corporate tax at a rate of 12% on preferred technological income, and 7.5% when the enterprise is located in Development Area A.
• Corporate tax at a rate of 6% for a "Special Preferred Technological Enterprise" — an enterprise of a company belonging to a group whose revenues are ILS 10 billion or more per year.
• Tax at a rate of 20% on dividends, and a rate of only 4% on a dividend to a foreign-resident company — under the conditions set in the law, including that at least 90% of the company's shares are held by foreign-resident companies.

The entry conditions for the track include: research and development expenses of at least 7% of revenues, on average over the three years preceding the tax year (or more than ILS 75 million per year), together with an additional condition — such as the proportion of R&D employees, an investment by a venture capital fund, or growth in revenues or in headcount — as well as meeting the competitiveness condition. There is also an alternative route, with the approval of the Innovation Authority, for innovation-promoting enterprises.

Read our full article: Startup Taxation in Israel →

Read our full article: Reduced Tax on Selling Intellectual Property to a Related Foreign Company →

Read our full article: Israel's New R&D Tax Credit →

Read our full article: Israel's 2025 Trapped Profits Law — Mandatory Dividends and the 25% Rule →

Tourist Facilities

Tourist accommodation facilities are not a "Preferred Enterprise": their benefits are granted under separate tracks, whose conditions and rates are different and depend on the area in which the facility is located.

Rental Buildings — Institutional Rental

The older "new rental building" track — in which the tax rates on income from letting or sale are 11% for a company, 18% for a foreign investors' company and 20% for an individual — applies only to buildings for which the application was filed by the end of 2023. For new applications, the "institutional rental building" track is open today, until the end of 2031:

• A building with at least 10 apartments — or at least 6 apartments in a peripheral area — let on a long-term basis for at least 15 years on average, out of the 18 years following completion of construction.
• The tax rates on income from letting or sale fall as the rental period lengthens: for a company — 11% in the first rental period, and then 9%, 7% and 5%; for an individual — 29%, and then 27.5%, 25.5% and 24%.
• Accelerated depreciation at a rate of 20% on a let apartment, and tax at a rate of 20% on a dividend sourced from income from the building.

Read our full article: Tax Benefits for Institutional Rental Buildings →

The above article does not constitute a recommendation, professional advice or a legal opinion. If you have any questions, you are welcome to contact us — we will be happy to advise, accompany and represent you before the Israeli tax authorities.

Kind regards,
Hager-Alperowitz & Co. — Certified Public Accountants