An operation to collect taxes from locked-in profits ended with tax revenues of NIS 2.9 billion

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by Ifi Reporter Category:Capital Market Dec 5, 2022

About three weeks ago, another round of the operation to collect taxes from locked-in profits ended, which resulted in tax revenues of NIS 2.9 billion, contrary to the forecast given at the end of 2021, which was only about NIS 1 billion. The operation was designed to deal with the problem created by the early version of the Capital Investments Encouragement Law, which resulted in companies locking up profits and not distributing them in order to avoid paying taxes.
The Law on Encouraging Capital Investments included until 2012 a clause exempting certain companies (exporters or located in a development zone) from corporate tax payments, but the exemption was conditional on the company not distributing a dividend or spending profits in any other way. This resulted in companies refraining from paying dividends, but also did not reinvest the profits in Israel, but kept the profits locked up within the company. (Other companies, such as Teva, found creative ways to spend the money without the expense being defined as a taxable expense, and this resulted in legal arguments amounting to billions of shekels between Teva and the Tax Authority).
In 2012, the law was amended and the capital investment promotion law was changed (amendment known as amendment 68), but in addition to it, the law contained another amendment (amendment 69) that allows companies with locked-in profits to distribute a dividend and pay a reduced tax, that is, the understanding was that instead of the companies staying with the profits forever and finding Creative ways to spend them without paying tax, it is better for the state to allow companies to withdraw the profits but pay a reduced tax for them. That operation generated revenues of approximately NIS 4.3 billion for the state for the settlement of NIS 60 billion in profits, which reflects a tax rate of approximately 7.1%.
In the latest Law of Arrangements, enacted as part of the 2021-2022 budget transfer, it was decided to repeat this operation (with the exception of minor amendments, so that companies that decide to distribute profits during the year 2022 (until November 14, 2022) will benefit from a reduced tax payment. The estimates were that the revenues would be about a billion shekels, but in practice, the revenues were about 2.9 billion shekels, for 35 billion shekels of locked-in profits that were released by 181 companies, this operation reflects a higher tax rate of 8.3%. However, there are still locked-in profits amounting to billions of shekels, and it is likely that soon Or later there will be another locked-in profits operation.

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