It’s no secret that tax considerations motivate companies and businesses worldwide. Registering a company, a patent, or operations in one country or another translates directly into money, and a lot of it - sometimes millions, or even hundreds of millions of dollars. The term “tax haven” is not necessarily negative, legitimate tax planning is routine, and various countries around the world open their doors to companies and entice them with juicy tax benefits.
With this in mind, and based on the social justice protest’s complaints about the high tax rates on individuals relative to the low tax rates exacted and benefits for Israeli companies, “threats” have been voiced by Israeli companies that: “if they raise our taxes, or reduce our benefits, we’ll leave.”
“Globes” has picked up the gauntlet, and has decided to check whether Israeli companies have where to go, and, most importantly, if it would be worthwhile for them to do so. A comparison between company tax policies in various countries to which Israeli companies could “emigrate,” reveals that the answer to this questions is not cut and dry, and that, in many cases, companies are better off staying in Israel.
The data, gathered by Baker Tilly Israel CPA Guy Reshtick and David Nahum, examined tax policies in the US, the UK, Russia, France, Germany, Cyprus, Bulgaria, Ireland, Israel, and tax haven countries like the British Virgin Islands, suggest that Israel offers very competitive tax rates when compared with other developed countries. This is the case for companies enjoying the benefits of the Law for the Encouragement of Capital Investment, but, presumably Israel is not as attractive in comparison to today’s “classic” tax havens, such as Cyprus and Eastern-European countries, such as Bulgaria.
Tax rates were evaluated using three categories of residency/company: foreign resident/foreign company, Israeli resident/foreign company, Israeli resident/Israeli company (in this category a distinction was made between companies that benefit from the Law for the Encouragement of Capital Investment, and those who do not).
The findings suggest that tax considerations will not motivate companies to move to the US, the UK, Germany, or France, as the tax rates for businesses in these countries and the taxes on dividends are higher, and range between 45- 55% “total tax” (which represents the full tax that companies would pay, including company tax, as well as dividend tax, if dividends are issued).
Israeli residents who want to set up a foreign company will find themselves debating between starting a company in the British Virgin Islands, which offers low tax rates relative to the rest of the world (0%, should they be willing to forego their Israeli residency, and 30% if not), and Israel, where tax rates are 30% under the Law for the Encouragement of Capital Investment, and 50% for companies that are not eligible for the law’s benefits. Other countries don’t offer any real competition for Israelis who do not want to forego their residency, because the tax rates that would apply to the companies would be much higher than, or similar to, those in Israel.
Blue and white high-tech
The picture is clearer for Israeli start-ups and technology companies, according to Baker Tilly Israel tax expert and CPA Guy Reshtick, who is of the opinion that the best option for Israeli high-tech entrepreneurs is to stay in Israel.
High-tech entrepreneurs are at the forefront of the Israeli economy. Almost all start-up entrepreneurs mull whether it pays to set up their company in Israel or abroad. Many factors are considered: proximity to global know-how, the cost of relocating employees, time differences, and many other factors. Yet there is no issue more important to the entrepreneur than the tax issue, which will dramatically affect the group’s profit for many years.
“The tax issue is not only relevant for huge companies, like Teva, for which we frequently hear about scenarios about their leaving Israel due to tax considerations, but also for new and promising technology companies, who are choosing more and more to register their businesses outside Israel,” says Reshtick. “Many go to the US, others to the UK, and others to nearby European countries that offer low tax rates, such as Cyprus and Bulgaria, or they consider operating in known tax havens, such as the Cayman Islands.”
Reshtick explains that “the technology companies benefit, or are entitled to benefit, from the Law for the Encouragement of Capital Investment (if they meet the requirements of 25% exports, employing 10 or more workers, and continued R&D). Likewise, naturally, the most relevant companies for these deliberations - whether to establish a company in Israel or abroad - are the tech start-ups. Of course, the tax policies mentioned do not necessarily apply to start-ups, but the Law for the Encouragement of Capital Investment is primarily relevant for technology companies.”
Law for the Encouragement of Zionism
The Law for the Encouragement of Capital Investment is an important element in decision making, as it provides Israeli companies with motivation to stay in Israel, at least to some degree, due to the benefits it provides. Under the Economic Arrangements Law for 2013-2014, beginning in January, 2014, company taxes for companies that meet the criteria for the Law for the Encouragement of Capital Investment will rise from 6% to 9% in the periphery, and from 12% to 16% in the center of the country.
But, if it seemed to anyone that the rise in taxes would cause a mass exodus of companies from Israel, Reshtick explains that there is no point in gunning the jet engines just yet. According to him, the Law for the Encouragement of Capital Investment was a game changer, and rendered the considerations of start-up companies thinking about leaving Israel almost entirely inconsequential, in terms of taxation.
In order to enjoy “total tax” rates between 27.2% in development areas A and 32.8% in the rest of the country, a company must meet three main criteria, which are very realistic for many young high-tech companies within a relatively short period of time: to export at least 25% of their product (to a market in which there are more than 14 million residents), to employ at least 10 workers, and ongoing product R&D. This serves the Israeli entrepreneurs when faced with the available options overseas,” explains Reshtick.
According to Reshtick, “If we look at the US, we see that moving operations over to Uncle Sam is saddled with cumulative “total tax” rates of 48% (company tax plus dividend tax). Visits from Israel and to Israel become less frequent as the distance grows, due to the long flights and difficult adjustment (jet-lag). If the groups’ members decide to take root in a country, they will need to decide if they want to raise their children abroad, with all the implications involved - in terms of language, culture, separation from family and friends, and the erosion of Zionist ideology.”
The second option, a European country, offers a broad range of possibilities for total taxes - high in countries like Germany, France, and the UK, whose “total tax” rates range between 36% and 44%, and low in countries like Bulgaria, Cyprus and Ireland, where taxes range between 12.5% and 30% - and the possibility of being in closer contact with family and friends relative to destinations on the other side of the ocean. “However,” says Reshtick, “there are other factors to consider, such as colder weather, poorer personal security, rising anti-Semitism, among other things. In addition, we shouldn’t forget that disconnecting from life in Israel is no small matter, and is not so simple, especially in light of recent court decisions.”
The problem with tax-havens
The third option, a move to a tax-haven country, in which the total tax rate is zero, takes a different guise than the first two options. “In this case,” explains Reshtick, “there is no need to make a physical move to the God-forsaken country itself, but it is enough to show “substance” in the company’s existence there. The law in Israel has defined a number of tests to verify that a company meets this criterion, among them is employing a local staff, having control over the company, and a number of other significant conditions, according to it will be considered a foreign company for tax purposes as well.
“Moreover, today “tax-haven” companies have become synonymous with “black capital,” and, because of this, there are more and more countries that do not recognize the legitimacy of doing business with companies from these “tax-havens.”
Giving up Israeli residency (for the individuals) is not simple at all, and involves many changes, objectively and subjectively, and, because of this, it is possible that there may be situations in which the individuals stay in Israel, but the companies are established outside of Israel.
These are the options facing the developing Israeli start-up. According to Reshtick, “At first glance, it seems that this option is the least attractive, in terms of taxation. However, in addition to the advantages to staying in Israel in terms of proximity to friends and family, culture, language, and familiar weather, if Israeli entrepreneurs build their start-ups in keeping with the terms of the Law for the Encouragement of Capital Investment, they can take advantage of tax benefits that will bring their “total tax” rates to 27.2% in the best case scenario, or 32.8% in the ‘worst case,’ depending on where in Israel they set up their start-up.”
The good part of the law
As part of the “Globes” campaign to expose the huge benefits that are given to the big companies in the market, the total tax benefits that were given to the largest public companies under the Law for the Encouragement of Capital Investment were revealed (NIS 16.8 billion over the past 5 years).
Furthermore, a list of the public companies that have enjoyed the benefits of the Law for the Encouragement of Capital Investment was also released, without details of size of the benefit given to each company. Thousands of companies appear on this list, including Yotvata, Strauss Group Ltd. (TASE:STRS), Nirlat Colors Ltd. (TASE:NRLT), Microsoft Israel, Google Israel, The Phoenix Holdings Ltd. (TASE: PHOE1;PHOE5), Ormat Industries Ltd. (TASE: ORMT), ICQ, Amdocs Ltd. (NYSE: DOX), Ackerstein Industries, B. Gaon Holdings Ltd. (TASE: GAON) unit Gaon-Agro, Tempo Beer Industries (TASE: TMPO) Fox-Weizel Ltd. (TASE: FOX), Golan, Dalton and Castel wineries, Michal Negrin, , Motorola, Netafim Ltd., Tefen Operations Management Consulting Ltd. (TASE: TEFN), Fox-Wizel Ltd. (TASE: FOX), Cisco, and many other small- and medium-sized companies.
According to Reshtick, this is the good part of the Law for the Encouragement of Capital Investment. “In other words, in so much as the focus of the Israeli financial discourse over the past year regarding the Law for the Encouragement of Capital Investment has been negative, based on the tax benefit that it gives big companies, such as Teva and Intel, it is important to emphasize the positives that it includes for new technology companies that are being established in the market, and the increased attractiveness of operating a start-up in Israel as opposed to overseas,” says Reshtick.
Published by Globes [online], Israel business news - www.globes-online.com - on November 26, 2013
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