50 a business activity in Israel or if such capital gain is attributed to a permanent establishment in Israel. However, if a foreign resident’s investment is managed from or made by a representative in Israel, such as through investment funds with representation in Israel, the profit from realizing shares in Israeli companies might be classified as ordinary business income, or alternatively attributed to a permanent establishment in Israel. As a result, the capital gain tax exemption may not apply, even if the investor is a passive limited partner in the fund. Furthermore, income from dividends and interest received from such investments is subject to tax in Israel and may be classified as business income, subject to higher tax rates (compared to tax rates on passive income). Since foreign residents may be exempt from capital gains tax in their countries of residence and are typically subject to lower tax rates on passive income, the higher taxes that apply in Israel can create a barrier to investment. Currently, eligible investment funds such as venture capital or private equity funds, may receive a tax ruling from the Israeli Tax Authority (the “ITA“). This ruling can regulate and reduce the tax liability in Israel for foreign resident investors in relation to capital gains, interest, and dividends derived from certain “qualified investments”. However, the tax ruling mechanism creates uncertainty and may change according to the decisions of the administrative authority, making it insufficient to accommodate foreign investors. Therefore, the Memorandum proposes to authorize the Minister of Finance, with the approval of the Finance Committee of the Knesset, to set regulations granting tax exemptions and reliefs for foreign residents under certain circumstances of investment in securities or other financial assets. Regarding capital gains, the proposal suggests amending the ITO to determine that capital gains derived from certain investments defined in the regulations will be exempt from tax, even if the gain is derived in connection to a permanent establishment in Israel, such as in the case of an investment fund with an office in Israel. Additionally, the amendment aims, among other things, to regulate in legislation tax benefits for foreign investors regarding interest and dividend income resulting from investments of the type specified in the regulations. In enacting such regulations, consideration will be given to promoting specific types of investments and the economic benefits they provide, considering the goals of encouraging capital investments and economic initiative, developing the production capacity of the economy, enhancing the business sector’s competitiveness in international markets, and creating a sustainable employment infrastructure. Regarding concerns of classifying passive income (including capital gains) as a business income, particularly in cases involving investment funds with Israeli managers, the proposal includes an amendment to the ITO concerning
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