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Foreign investors getting full tax exemption on hi-tech investment in Israel, finance minister announces

VC fund manager Matty Karp says the move, which comes into effect immediately, may prove too little too late

Foreign investors in Israeli hi-tech companies will enjoy full tax exemption, effective through January 1, 2004, Finance Minister Silvan Shalom announced today.

His decision was prompted by the crisis in the global technology and finance markets, which has discouraged investment in general. Investment in Israel, in particular, was also hampered by tax difficulties, pundits say.

Income Tax Authority Commissioner Yoni Kaplan said the treasury's decision will not turn Israeli venture capital funds into tax shelters. As in the past, the Income Tax Authority will conduct a pre-ruling process for each decision investors make.

The minister's ruling comes into immediate effect.

Zuri Dar adds:

"It's an important step that recognizes the difficulties of Israel's venture capital industry," commented Israel Venture Association chairman Yigal Erlich. "I'd have been happier if it had been taken a year ago, but it's never too late."

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He pointed out that in today's fierce competition over dwindling resources, the minister's decision could be the key factor in investment decisions.

Genesis managing partner Eddy Shalev concurred, saying the timing of the "excellent move" was right, and that Israel had not missed the boat yet. He said that European investors, who had complained vociferously about Israel's previous tax policy, praised the change.

Concord cofounder Matty Karp was less sanguine. Concord recently postponed a financing round for a new fund to the first quarter of 2002, because of the adverse conditions in market, and the aversion investors had developed for Israel because of the tax situation and the intifada.

Karp noted that the announcement had been vague as to the exact beneficiaries of the tax break: would it apply to investors in companies, and/or in venture capital funds? If only to direct investment in companies, the decision did not go far enough.

"Beyond that, there's a question of execution," Karp said. If the tax authorities' fear that it will be abused, they might demand a pre-ruling for each investor and each investment, which would be a deterrence. Moreover, Israel still has its security problems.

"I fear it may have been too little too late. The state may have to take more, creative steps to attract investors to Israel," Karp said.