59 / 114
The US-Israel Legal Review 2019 59
were generated in the business. However, passive
losses accrued in Israel can be offset only against
passive income, which is identical in its kind, and
only during the current year.
Foreign Losses:
Foreign business losses incurred
during the current tax year will first be offset
against foreign business income, including capital
gains in the business, and the rest of the loss will
be offset against foreign passive income. Foreign
business losses that were not offset in their entirety
within the current tax year (neither against business
income nor passive income), but were incurred in
a company which is managed and controlled from
Israel, may be offset against Israeli income as well.
The rest of the aforementioned foreign business
losses may be offset against foreign business income
in the following tax years. Notwithstanding, foreign
passive losses can be offset only against other
foreign passive income (and can be carried forward
to future tax years).
TAX CREDITS
As mentioned above, Israeli resident corporations
are subject to tax in Israel on their worldwide
income. As a measure to avoid double taxation,
the ITO enables a mechanism of foreign tax credits
against Israeli tax for income of the same category
for which the tax was paid abroad. Any excess of
tax credit can be carried forward for a maximum
period of five years.
Indirect Tax Credit:
In general, where an Israeli
resident corporation received dividends from
a non-Israeli resident company (a subsidiary in
which it has an interest of at least 25%, or a second-
tier company in which it has indirect interest of at
least 50%), the Israeli resident corporation is also
entitled to a tax credit in the amount of the foreign
corporate tax paid by the foreign subsidiary on its
profits, fromwhich the dividend was paid.
SPECIAL TAX REGIMES AND EXEMPTIONS
Special Tax Regimes:
The Encouragement of
Capital Investments Law (the
“Investment Law”
)
provides special benefits for industrial and high-
tech companies in Israel. In this respect, there are
two main tax regimes currently suggested under
the Investment Law (there is an additional tax
regime which is no longer in force): (i)
the Preferred
Enterprise Regime
, under which a company is
entitled to a reduced corporate tax rate of 16%
(unless the Preferred Enterprise is located in a
specified development zone, in which case the rate
is currently 7.5%). The company needs to meet
certain conditions stipulated in the Investment Law
in order to qualify as a Preferred Enterprise, such as
being an Industrial Company; and (ii)
the Preferred
Technology Enterprise Regime
, which is intended
for high-tech companies that highly invest in R&D,
and provides a reduced corporate tax rate of 12%
(or 7.5% if the company’s Preferred Technology
Enterprise is located in a specified development
zone). A company must meet certain conditions
stipulated in the Investment Law in order to qualify
DANIEL PASERMAN
PARTNER AND HEAD OF TAX
The Encouragment of Capital
Investments Law provides special
benefits for industrial and high-
tech companies in Israel.