Tax exemption: contradiction of interests?
Photo: Index Open
Foreign investors to lose tax benefits?
Foreigners investing in short term loans enjoy tax exemptions and raise value of shekel; Finance Ministry considers curtailing these benefits to stop flow of dollars into Israel
The Finance Ministry is considering getting rid of tax benefits granted to foreigners investing in short-term loans, Yedioth Ahronoth learned Wednesday.
While Israelis pay a 15% tax for profits made in the capital market, foreign investors pay none. Moreover, foreign investors are exempt from paying taxes on interest and discount fees.
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The cancelation of the tax benefits will significantly reduce the feasibility of such investments; in fact, capital market experts estimate that it will reduce the demand for short term loans. Foreign investors currently hold 27% of the short term loan market, which is the Bank of Israel's primary monetary policy management tool.
The number of short term loans produced by the Bank of Israel has risen by NIS 40 billion ($11.3 billion) since 2006, and the share of the market held by foreigner investors has been growing steadily.
The trend goes against the Bank of Israel's efforts to reduce the value of the shekel; the bank creates short term loans in order to absorb funds, and then uses them to buy dollars. Meanwhile, foreign investors convert dollars into shekels to buy short term loans – the profits of which are not taxed.
In the beginning of 2009, in the aftermath of the financial crisis, the exemption was expanded not only to state loans and government bonds, but also to corporate bonds. Now the Finance Ministry is considering reining the exemption back in.
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