Dear Colleagues and Clients,
In light of the extensive financial ramifications of the Coronavirus crisis, the Government of Israel published draft regulations1 that are intended to incentivize economic activity in Israel. These Accelerated Depreciation Regulations provide tax benefits to businesses that will acquire equipment to be used in certain benefitted activities.
The Accelerated Depreciation Regulations will represent, when officially promulgated, an important opportunity for businesses that want to increase the scope of the business activity in order to cover the dire losses suffered during the Coronavirus crisis. We recommend to our clients to review the option to implement the beneficial provisions in the regulations, while paying attention to the limitations and conditions included therein.
This update will review the main conditions included in the Accelerated Depreciation Regulations. Please note that at this stage, the regulations have been published for public comments and there may be some changes in the final version of the regulations that will be promulgated. We advise our clients that believe this matter is relevant to them to keep in touch with us regarding the provisions that will be included in the final Accelerated Depreciation Regulations.
The purpose of the Accelerated Depreciation Regulations is to encourage capital investments in the fields of industry, agriculture, construction and hotels, as part of the Government's efforts to assist businesses in dealing with the economic consequences of the Coronavirus crisis.
According to the draft regulations, a taxpayer, who operates in certain economic branches, that will acquire equipment which will be used in its business activity, from 1 September 2020 through 30 November 2021 shall be entitled to enjoy double depreciation rates.
The cost of acquiring property is usually depreciated and allowed as a taxable deduction over several tax years, according to the applicable tax provisions with respect to each property type. The accelerated depreciation is expected to increase the taxpayers' deductible expenses and thus reduce their tax liability during the property's depreciation period. As a result, the acquisition of property and equipment that will be used in business activity becomes more economically desirable.
Eligibility Conditions for Accelerated Depreciation
Only taxpayers that the majority of their activity during the tax year is benefitted activity and at least 50% of their income is from benefitted activity (not including income from sale of an asset or rights in real estate or a real estate association) may be entitled to claim the accelerated depreciation rates.
A benefitted activity, for these purposes, includes activity (but not ancillary activity) in the fields of (a) industry, including development of software and research, agriculture and construction, but excluding packaging, commerce, transportation, storage or provision of communication services, sanitary services or personal services, and (b) the operation of a hotel in Israel.
The accelerated deprecation rates will apply with respect to acquisition of equipment, as such term is defined in the depreciation regulations, including ,machinery and work vehicles other than trucks, provided that (1) the equipment was purchased on any day from 1 September 2020 through 30 November 2021 (the "Determining Period"), and (2) the equipment was used to generate income in Israel until the later date of six months after its acquisition of 30 November 2021. The equipment needs to be used in benefitted activity to generate income during the entire depreciation period.
A taxpayer that elected to apply the accelerated depreciation needs to do so with respect to all equipment purchased during the Determining Period. A taxpayer that prefers not to apply the accelerated deprecation rates, but to use the standard depreciation rates, is entitled to do so.
Limitations on Eligibility for Accelerated Depreciation
The regulations include several additional limitations that may negate the eligibility for accelerated depreciation. The purpose of these limitations is to prevent a taxpayer from receiving benefits if it did not purchase new equipment from a third party.
Specifically, the regulations shall not apply with respect to equipment that was acquired from a related part or for no consideration, equipment that was previously used as stock of inventory at the hands of the taxpayer, or equipment acquired through a tax-free reorganization. In addition, in order to prevent double-benefits the regulations shall not apply with respect to equipment that is used by the taxpayer as part of a franchise or sub-franchise received from the State of Israel.
Tax Planning Prevention
In order to prevent tax planning pursuant to which accelerated depreciation is claimed with respect to property that is then transferred to a related party that will also benefit from depreciation, the regulations provide that the tax basis of equipment that was subject to accelerated depreciation and was then sold to a related party, shall be zero.