The Income Tax Authority refused to exempt Israeli investors from tax on venture investment gains. But it agreed to give foreign investors a break, changing their tax exemption from temporary to permanent.

The issue came up yesterday at a meeting between the chairman of the Knesset's hi-tech committee, MK Eliezer "Modi" Sandberg, Income Tax commissioner Tali Yaron-Eldar, the chairman of the tax reform committee, Yair Rabinovitch, representatives of the venture capital funds, and representatives of the CFOs Forum.

One issue the sides agreed on is that foreign investors will not be eligible for tax on venture gains. The Income Tax Authority will lay out the terms of eligibility for the tax break for foreign investors, which will be permanent.

Israel's finance minister had already issued a temporary order exempting foreigners from tax on venture gains over a two-year period. Now the exemption turns permanent.

The parties also agreed to a ceiling on National Insurance payments for stock option gains, at five times the average wage. Today there is no limit to such payments.

The tax authority did not accept the VC demand to exempt Israeli investors from tax on gains from tech investments made through venture capital funds.

Venture capital manager Yoram Oron said the funds are trying to create conditions under which Israeli private and institutional investors would route more money to investing in startups.

The funds' capital accrual might be negative in 2002, he warned, meaning that annulment of commitments may outweigh fresh commitments. In 2000 the funds raised $3 billion for venture investing, followed by $2 billion in 2001.