Source: Bank for Industrial Development, Changes to the Law for the Encouragement of Investment Capital: Explanations (Tel Aviv: Bank for Industrial Development, 1990), [unnumbered pamphlet].

For a company owned by local investors the benefit period is seven years starting from the first year of profit, provided that 14 years have not elapsed since the date that the enterprise was given approval, and 12 years have not elapsed since the project was executed.

For a company owned by foreign investors the benefit period with respect to company tax is ten years; there is no limitation regarding dividends. The reduced tax rate applies to programs approved after 1 April 1985.

An approved enterprise may receive larger tax exemptions rather than accept investment and capital grants if it wishes. It is entitled to a full exemption on undistributed income for a period which varies according to the location of the project, as follows:

• Development Area A ten years
• Development Area B six years
• Central Region two years

For the rest of the benefits period (seven years in Development Area A and the Central Region and ten years for a foreign investment company in all areas) the enterprise receives tax concessions as a regular approved investor. The exemption does not apply to distributed income, and companies paying dividends will pay company tax and dividend tax on the dividend.

Until 1985 loans at subsidized rates of interest were available. The government is still subsidizing credits under the pre-1985 arrangements although the absolute amount is shrinking every year. Table 1 shows how this has reduced the total level of subsidy to the business sector.

In 1982 subsidized loans financed 22.8 percent of industrial investment; in 1987 they accounted for 2.3 percent. Grants increased their share over the same period, but only by 2.3 percent: from 10 percent to 12.3 percent. Thus, the share of subsidized investment fell during these five years from 34.5 percent to 14.6 percent.

Source: Bank of Israel, Annual Report 1985 (Jerusalem: Bank of Israel, 1986), calculated from Chapter 1; Bank of Israel, Annual Report 1986, calculated from Chapter 1; Bank of Israel, Annual Report 1988, calculated from Chapter 1 [Hebrew].

Source: Bank of Israel, Annual Report 1988 (Jerusalem: Bank of Israel, 1989), p. 185 [Hebrew].

The Loan Guarantee Option

The Ministry of Industry and Trade has recently supplemented grants and tax exemptions with a system of loan guarantees. These will apply only where certain minimal conditions are met, including the amount of capital invested in the firm and the size of the investment.

Firms will be able to receive guarantees on loans for up to two thirds of approved investments, either in setting up new ventures or expanding existing ones. They will have to pay 1 1/2 percent as a premium and will receive tax concessions as well. (Ten years in Development Area A, six years in Development Area B and two years in the Central Region). They will also benefit from accelerated depreciation. The definition of allowable assets has been expanded to include land, rent, purchase of second-hand buildings, second-hand equipment, know-how purchased outside the company, working capital, marketing expenses, and the current costs of research and development.

The loans will be available from the banks at interest rates whose maxima are controlled. A dollar linked loan for the purchase of equipment will have a maximum interest rate of LIBOR (London Interbank Offer Rate) plus 3 1/8 percent. This is the maximum that can be charged in Israel. Firms which can raise funds abroad more cheaply are free to do so. It will also be possible to obtain a mix of loan guarantees and grants. In this case the maximum grant in Development Area A is 25 percent (rather than 38 percent without loan guarantees) and in Development Area B, 10 percent (rather than 20 percent). Guarantees are then available for loans for up to the same amount as the grant. Tax concessions and accelerated depreciation are also available.

The 1991 budget allocated NIS 700 million for this scheme. 6

Approved enterprises under any option are eligible for exchange rate compensation.

* In support of local production.

Source: Bank of Israel,Annual Report 1989 (Jerusalem: Bank of Israel, 1990), p. 191[Hebrew].

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