Apax Received Full Exemption on 1b Shekel Tax Bill for Tnuva Profits

During the years that Apax held Tnuva, the company distributed dividends totaling 3 billion shekels

Tnuva's logistic center in the southern town of Kiryat Malachi May 22, 2014.

The Tax Authority hands out discounts worth billions of shekels to foreign investors, venture capitalists and private equity funds, even though it doesn’t have explicit authority to do so by law, according to a harsh State Comptroller report published on Wednesday.

One such example is the Apax fund, which launched operations in Israel 22 years ago and had received unusual tax exemptions contrary to the stance of the Tax Authority’s international taxation department. The report refers to Apax as “Fund A.”

Based on an approval that Apax received in 2001, foreign investors can receive a full exemption on revenues from investments in Israeli companies and companies tied to Israel, regardless of whether they have permanent operations in Israel. Management partners in Israeli companies can also be granted a full tax exemption if they invest more than $100 million in Israel.

In 2008, Apax bought Israeli food manufacturing giant Tnuva from its owners, which included the state, at a market capitalization of 3.85 billion shekels. During the years that Apax held Tnuva, the company distributed dividends totaling 3 billion shekels. Seven years after the initial purchase, Apax sold Tnuva to the Chinese company Bright Food at a valuation of 8.6 billion shekels.

Including the dividends, Apax made a profit of 4.4 billion shekels on its Tnuva investment. Yet it received a full exemption from paying taxes, which should have equaled 25% of its profits, or approximately 1 billion shekels.

Hundreds of funds have raised billions of dollars in Israel over the years, including venture capital funds, which invest in early stage high-tech companies, as well as private equity funds, which invest in more established companies in a range of fields.

According to the comptroller’s report, the Tax Authority set several precedents over the years, including tax discounts for venture capitalists and private equity funds. Some received a full exemption from taxes on profits, interest payments and dividends.

The comptroller examined how the Tax Authority handled taxation for those funds, an issue not explicitly delineated in law.

“Tax exemptions should not be based only on judgment,” stated that comptroller.

The comptroller notes that in 2007, when the Tax Authority committed to giving Apax a full exemption on all future taxes related to its sale of Tnuva, which it has not yet purchased at the time, it made a precedent-setting decision.

“The case of Fund A. exemplifies the need to regulate the fund sector. Given the large scale of the tax benefits granted to funds, it is appropriate that they be set in law and regulations with clear criteria for receiving such exemptions,” states the report. “In addition, we should examine the benefit to Israel’s economy that such exemptions bring over the years.”

The Tax Authority stated in response, “The interpretation that the authority adopted regarding funds saves unnecessary bureaucracy, and eases the way for foreign investors. The Tax Authority director has limited his authority to granting exemptions to funds that clearly will make a large contribution to developing Israel’s economy and high-tech industry.”

It added that the Tax Authority itself has worked to change legislation on the matter, and that a bill has already passed its first reading in the Knesset, meaning it has received preliminary approval on the way to becoming law.

Regarding the exemption granted to Apax, the Tax Authority stated, “The authority’s goal in granting permits to Fund A. was to encourage investments by ‘mega funds,’ of which there are only a few in the world. A fund like Fund A. will pull investments from other important international investors, which will see investments in Israeli companies as worthwhile, stable and dependable.”