The Encouragement of Capital Investments Law, 57191959- (hereinafter: the “Law”) is designed to encourage investment in the Israeli industry and there is a dual purpose for its legislation: First – to promote Israel in comparison to other countries by awarding tax incentives; second – to encourage the maintenance of businesses in the Israeli periphery.

In recent years, several amendments have been made to the Law (primarily Amendment 68 and Amendment 73), which introduced a comprehensive reform in the manner in which the benefits included in the Law can be used.

As we shall see in this article, the main goal of the said amendments was to encourage manufacturers and industrialists, both local and foreign, to set up factories in Israel instead of abroad, a global trend of many countries that is becoming more prevalent lately around the world, particularly since the beginning of the presidency of Donald Trump, who seeks to encourage many American companies to return and re-open production factories in the United States.


As stated above, the purpose of the law is a dual purpose; both to promote Israel in the “tax competition” with other countries and to encourage businesses in the peripheral areas of Israel.

The law and the regulations installed by virtue of it, effectively determine two kinds of incentives1:

  1. Incentives whose main purpose is to increase economic growth, which aim at increasing investments in the economy as a whole.
  2. Incentives whose main purpose is the development of the periphery, in such way that these are intended to influence the spreading of the industry throughout Israel and increase activity and investments in the periphery.

The benefits included in the Law are granted when there is an establishment or expansion of an industrial factory or a tourist enterprise in two tracks – the grants track and the tax benefits track.

Important amendments to the law in recent years:

Two major amendments to the law have been approved in recent years, dramatically affecting it. The first and major one is Amendment 68 of 2012, which we will elaborate on below. The second, which will not be discussed in this article, is Amendment 73 of 2017, which relates mainly to income from intangible assets. In parenthesis, we shall add that in the past few days, the Israli tax authority has updated its policy to include the stipulations of the Law also on startup companies.

Until Amendment 68, the law placed an emphasis on attracting capital to Israel and encouraging economic initiatives and foreign capital and local capital investment, inter alia, in order to develop the production capacity of the country's economy, improve the country's balance of payments and absorption of immigrants. Within Amendment 68 to the Law, it was decided to provide a more comprehensive and appropriate answer to the economic challenges that the Israeli economy faces in general, and the industrial sector in particular. Therefore, the purpose of the law was changed so that the emphasis was placed on innovation and activity in development areas, to develop the economy's production capacity, improve the competitiveness of the business sector in international markets and create more work places.

The Amendment changed both the tax benefits track and the grants track. For example, as part of the grants track, the mechanism regarding grants in the industry was extended also to investments in non-physical capital, with the purpose of expanding the mechanism to other areas that could develop the industry, such as the training and development of workers.

As part of the tax benefits track, prior to the Amendment, the Law established a complex benefits mechanism, which often created uncertainty amongst investors with respect to the tax rates they had to pay in practice, and therefore, could significantly harm Israel's ability to attract investments to the industry. Under Amendment 68, an extensive change was made in Article 51 of the Law, by adding mark B1 and- B2 of Chapter VII of the Law, under which the tax benefits mechanisms for a “preferred company” that is the owner of a “preferred factory” were founded, as well as tax benefits mechanisms for a “preferred company” that is the owner of a “Special preferred factory”.

More specifically, we shall note briefly that a “preferred company” (a company incorporated in Israel, which is not fully owned by the government and which meets a number of cumulative conditions provided by law), which owns a “preferred factory” (an industrial factory which meets the terms of “competitive factory” that are listed in Article 81A of the Law) and has “preferred income” (income that is derived from the Israeli activity of the preferred factory) will be entitled to a preferred tax rate on the total preferred income of the preferred factory. Therefore, as of 2015 onwards, preferred factories could benefit from a reduced tax rate of 6% in development areas A (as defined in the Second Addition to the Law) and 12% in areas which are not development areas A. These tax rates are much lower than those that prevailed prior to Amendment 68.

In addition, Amendment 68 set out additional tax benefits, inter alia for “special preferred factory” (as defined by law), in distributing dividends and by accelerated depreciation.

As described below, the objectives of the new law are in line with the prevailing trend around the world in recent years, as can be seen in the American economy.

The Amendments to the Law in Light of the Prevailing Global Trend:

As noted above, the change in the purposes of the law was such that the emphasis was given to developing the economy's production capacity, improving the competitiveness of the business sector in international markets and creating more work places. The common denominator of these goals is actually strengthening local production rather than production in foreign countries that are considered cheaper for such activity (such as China, Turkey, etc.).

This trend is not unique to the Israeli economy but is becoming increasingly common among other countries around the world. For example, in the United States, President Trump tries to create work places and strengthen local production by imposing taxes on imported goods from China. In contrast to the approach adopted in Israel, i.e. the granting of tax benefits and grants to encourage production and reduce costs, in the United States, in light of the difficulty to make production considerably cheaper and affordable, Trump chose to impose restrictions (in the form of taxes) which will make production in other countries more expensive. It may not be the same method, but the final goal is identical- encouraging the local production industry and creating new work places.


Thus, in recent years, it is more beneficial for local industrialists and manufacturers to receive the benefits and grants granted by the Encouragement of Capital Investments Law, and to set up their factories in Israel. By exploiting the mechanisms that are established by Law, manufacturers have the potential to increase their profits while making a significant contribution to the Israeli economy's production capacity, improving the competitiveness of the business sector in international markets, and creating work places in the periphery. It is a win-win situation in every aspect.


1. Income Tax Notification no. 3/2012 of the ISA, dated 10.6.2012.

Originally published October, 2018

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.