Israel gives foreign PE investors tax break

Israel will exempt foreign investors from tax on profits derived from private equity fund investments, according to a statement from Israel’s Ministry of Finance.

The new regulation is designed to make the Israeli economy more attractive to foreign investors in the wake of the economic crisis. Presently, the profits of foreign investors in private equity funds are taxed at a rate of 15 percent for individuals and 25 percent for corporations.

Profits on investments in venture capital funds are tax-free. Tax exemption for investments in venture capital funds has significantly increased foreign investments in domestic venture capital funds, the ministry notes.

The new regulation follows a resolution grounded in legislation this year to expand exemptions for foreign investors. These include exemptions for profits from the sale of shares of Israeli companies and exemptions for profits from investments in corporate bonds, the statement says.

In Israel, there are currently 10 active funds with an investment volume of approximately $2.5 billion. The main investors in private equity funds in Israel are Israeli and foreign institutional investors, with the foreign institutional investors enjoying tax exemptions.

The economic downturn has affected Israel’s venture capital industry. In the first quarter of 2009, venture capital firms invested $265 million in 93 Israeli companies, according to a survey by the IVC Research Centre, an Israel-focused venture capital and private equity research provider. This was down from the $617 million invested in 135 companies in the same period in 2008. The first quarter of 2009 was the worst quarter in terms of the total value of venture investments recorded in Israel in the last three years.

Forty percent of the $265 million provided in the first quarter of 2009 was invested by Israeli venture capital firms and the remaining 60 percent by foreign venture capital firms. Thirty four percent of the total amount was invested in the communications sector, followed by 21 percent in software and 19 percent in life sciences.