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The PA`s Tax Paradise for Investors
Israelis groaning under the weight of heavy taxes can envy residents of the Palestinian Authority. The top tax bracket on individual and corporate income in the Palestinian areas is just 22 percent. And that`s just the appetizer: It turns out that the PA is a paradise for foreign investors as well as Israeli ones. Not in vain have dozens of Israeli firms already signed up at the office of the registrar of companies in Gaza. And the Gaza Strip serves as a basis for their diverse operations, be it production, services or import-export.
Large Israeli accounting firms responsible for the big international conglomerates are frequently asked about the advantages of registering companies and setting up factories in the PA. As surprising as it may sound, Israeli businessmen looking to reduce their business`s tax component have already visited the Palestinian registrar of companies.
Attorney Gideon Fisher of Tel Aviv established a special department at his firm to handle financial and legal aspects of dealing with the PA. He recently prepared, at the behest of the Association of Accountants, a document discussing legal, financial and tax issues involved in doing business with the Palestinians. In a conversation, he said what made the territory so tempting is that many Israelis no longer regret that it is not under Israeli control.
According to him, the hottest thing in the PA is the investment promotion law, which was passed in order to encourage direct foreign investment in the PA-controlled areas in the West Bank and Gaza. The 1995 law, which was amended and updated in 1998, formally set up the Supreme Palestinian Investment Promotion Agency, which was authorized to review and approve requests for incentive grants and benefits granted by law. The agency is authorized to divide the PA territory into three zones and establish incentive levels for each one, as well as the extent of benefits to be given to those investing there, in order to be able to better oversee the pace and nature of development.
The Palestinians realized that in order to attract investors, enticing incentives
had to be offered. Therefore, the PA determined that investors investing
between $100,000 and $1 million would get full exemption from taxes for five
years and get a reduced tax rate of only ten percent for eight years. Investment between $1 million and $5 million would merit a five-year tax exemption, followed by 12 years of a 10 percent tax rate. Investment of more than $5 million would merit a five-year tax exemption, followed by a tax rate of 10 percent for 16 years. In special cases, reduced tax rates would be approved for a period of up to 20 years.
The investment promotion law guarantees the return of the entire sum invested, as well as profits, with the payment of the relevant taxes deducted. Investors are also guaranteed protection in case of nationalization and other confiscation, and they are given the right of permanent residence in the Palestinian territories. It is possible, incidentally, that this clause will in the future enable Jewish residents of the West Bank who own factories there to be annexed, together with their businesses, to the Palestinian state that is likely to be established. Palestinian law also has sections dealing with the suspension and cancellation of licenses in certain circumstances - bribery or the submission of counterfeit documents during the application process.
Fisher, who registered several Israeli companies in the PA, says there are differences between registering a company in Gaza and registering one in the West Bank. In the West Bank, Jordanian law still applies, although it is a law that has since been changed in Jordan. In the Gaza Strip, the registrar is more flexible: Israelis can register companies, but Fisher recommends they take on a local partner, even if only a minor one, to speed up the licensing process. In any case, registering a company in Gaza will take two or three days, whereas in the West Bank it will take several weeks. In the West Bank, the owners will be asked to present a work permit - another bureaucratic matter making life difficult for foreign investors in the West Bank.
Israelis operate in Gaza for various reasons: Some register as a company there in order to operate in Gaza at the Karni industrial zone (the Erez checkpoint); others register as a company there in order to use the Gaza Strip as a base for import or export activities. Israeli importers who sell merchandise to the Palestinian sector must ship their containers through the port in Ashdod, but if the company ordering the goods is a Gaza firm, even an Israeli-owned one, the container will be shipped directly from Ashdod to Gaza while still closed and the Israeli company will enjoy the tax benefits of a foreign investor in the PA. With the Israeli market constituting the PA`s primary trade partner, total trade between Israel and the PA amounts to approximately $4 billion annually.
Interest in trade and investment opportunities in the PA is not unique to Israelis. It encompasses numerous international entities. The European Union and the U.S. have signed agreements that grant a tax exemption for scores of products.
No permits in advance
Entrepreneurs seeking to export products from the PA need not obtain a license or a permit in advance, beyond a certificate of origin issued by the Palestinian Ministry of Economics, Trade and Industry for a one-time deal or a certificate of origin for ongoing deals.
The PA has no law providing special protection for agents and distributors. The Palestinian Ministry of Economics, Trade and Industry recently issued new regulations regarding the necessity of appointing a Palestinian representative to handle the foreign company`s business in the Palestinian areas. In the West Bank, a directive was even issued prohibiting anyone who is not a West Bank resident form handling a foreign company`s business, including distribution rights, unless he received approval form the local economics division. Therefore, Fisher says, Israeli distributors with rights that also include the territories are left with franchises for marketing in Israel alone.
According to Fisher, in talks with senior officials at the Palestinian Economics, Trade and Industry Ministry, he was told that Israeli companies encountering this type of problem should discuss it with ministry representatives. One suggested solution to the problem is to establish a firm with a local partner in the Palestinian territories, Fisher said.
He added that the PA promises to make its best effort to pass legislation that will protect intellectual property, promising to set up appropriate oversight and registration systems to handle requests to register logos, prototypes and patents.
Incidentally, the legal protection for registering and enforcing trademark laws in Gaza is based on a recently amended 1938 British Mandate law. Nevertheless, Fisher says, the protection of intellectual property rights and patents registration is efficient in Gaza but less so in the West Bank.
Effective production
When legal intervention in business disputes is needed, Fisher says the legal system in Gaza is effecient. He says the court system there provides effective protection for trade disputes and contract enforcement. A well-formulated contract will be enforced and, thanks to the presence of a well-trained police force in Gaza, it is possible to effectively enforce court rulings. On the other hand, things are not much different in the West Bank.
Taken from the daily Ha`aretz
Jan.13, 2000