Tax reform gives Israeli VCs a boost

Israeli venture capital funds will reap the benefits of their government’s decision to scrap taxation of foreign investments in local funds until January 1, 2004.

The announcement follows finance minister Silvan Shalom’s decision in June to lower the rate for non-resident investors in Israeli venture capital funds and to align it with the tax rate in their countries of origin. The reform is an important move for the Israeli private equity market to help strengthen the flow of foreign investments into domestic funds.

Prior to the tax exemption, the tax rate was an obstacle for anyone investing Israel, says Etan Hillman, general manager of the Israel Venture Association. Foreign investors were liable to dual taxation on profits from investments in local funds and start-up companies. However, the reform will not have an immediate effect on the declining investments in Israeli’s high tech sector as it continues to suffer under global market conditions. Hillman says that while it is a shame the reform did not come sooner it is better late than never. He said: “We would preferred to have benefited earlier when times were more conducive to global investments.”Hillman adds that the reform is an important step for private equity culture in Israel. It shows the government recognises the importance of attracting foreign capital to Israeli high tech investments.

Last year $3 billion was invested in Israeli funds. Of this amount around 85% was money from overseas. This year, Hillman predicts investment in Israeli funds will total less than $1 billion. With the tax exemption in full force the situation should improve, but there are also other factors hindering the development of this market such as its regional conflict with the Palestinians and the worldwide financial situation. At the moment, says Hillman, investors prefer holding onto their money rather than investing it.