The Rabinovitch Committee on tax reform will recommend a 100% tax exemption for foreign investors in Israeli startup companies. But this could have a detrimental affect on investment incentives in local hi-tech companies that are included in the taxation agreements of Israeli venture capital funds.
The committee's recommendations could free venture capital funds from their obligation to invest the majority of their managed capital in Israeli companies, as determined last year in an arrangement between the funds and tax authorities.
The committee also discussed Prime Minister Ariel Sharon's proposal to expand the tax exemption on high tech investments to Israeli companies so as to promote investment during the current economic crisis. The committee however decided not to adopt the prime minister's proposals on the grounds that they would discriminate against local investors in other sectors. Players in the local venture capital industry believe that Sharon will issue a ministerial order granting a temporary exemption to Israeli investors in the local high tech industry.
The committees recommendations would grant foreign investors a full tax exemption on profits from the exit of their investments in Israeli high tech companies. The recommendation applies to all foreign investors and not just those investing through venture capital funds. These in any case give investors a temporary tax exemption for two years under a tax agreement reached with the finance ministry in September 2001.