Israeli Pharma Giant Teva Will Make NIS 336 Million Tax Payment and Free Up 'Trapped Profits'

In return, company will invest hundreds of millions in local manufacturing plants.

Teva Pharmaceutical Industries announced Thursday that it had informed the Israel Tax Authority that it will be making a NIS 336 million tax payment pursuant to the provisions of the investment encouragement law. The statute allows Israeli companies to use tax-exempt profits accumulated through 2011 to pay shareholders dividends subject to the payment of taxes at a reduced rate.

As required by law, in return, Teva will also invest hundreds of millions of shekels in Israel in the company's manufacturing plants and in fix assets in priority development regions. Teva's investment comes in addition to a new drug facility it is building in Jerusalem and a national network for brain research, neurology and psychiatry that the company is creating here.

The law allows Israeli companies to opt to pay reduced taxes on so-called "trapped profits" such as Teva's by November 11, and the pharmaceutical giant is considering making other tax payments in this connection by the deadline. In its full-year financial report for 2012, Teva noted that its trapped profits as of December 31 stood at $11 billion, adding that if this sum were paid out as dividends, the company would incur a tax liability of $2.13 billion.

Teva said it had not made provisions for payment of the tax because it did not intend to pay dividends with the funds but instead to reinvest them in Israel. The company also noted that it has until November of this year to opt for a one-time $700 million tax payment here instead of the usual $2.1 billion tax on the trapped profits.

The announced NIS 336 million tax payment – $91 million – will free up $1.5 billion from its pool of trapped profits. The provisions of the law for the encouragement of investment require that Teva make a NIS 250 million investment here in the next five years in return.

Teva's president and CEO, Jeremy Levin, and Finance Minister Yair Lapid recently agreed to set up a working group to examine the tax law and Teva's tax payments under the law.

Reuters