The long awaited renewal of tax breaks for investors in start-ups has been enacted (Law for the Encouragement of Technology Industry (Temporary Provisions) 2023 – Book of Laws 3071, July 31, 2023). Will it save the Israeli tech sector now in the doldrums? Below is a short summary of the latest law, nicknamed the Angels Law, which is effective until December 31, 2026.
R&D Company:
The Angels Law offers various tax breaks mainly for investments in an “R&D Company”. In brief, an “R&D Company is a company incorporated, controlled, managed and mainly active in Israel, not part of a publicly traded group, tax compliant, not fiscally transparent. Up to the previous December 31, technological revenues totaled under NIS 4.5 million, overall revenues totaled under NIS 12m., 70% of expenses were development of an intangible asset owned by the company, and R&D expenses averaged at least 7% of revenues in the preceding 3 tax years. Also one of the following apply: 200 or 20% of employees in R&D; a venture capital fund invested in it NIS 8m.; annual revenues were over NIS 10m. and grew 25% each year for 3 years; or average number of employees was over 50 and grew 25% each year for 3 years.
Investment tax credit:
An investor may claim an Israeli tax credit for investing in an R&D Company up to the amount invested (maximum NIS 4m.) times the capital gains tax rate (25%-33%) if the shares concerned were to be sold. Various conditions apply.
In particular, the shares must be allotted to the investor by the R&D company, not purchased from another investor...
Also, the investment must generally be held for 3 years unless the Israeli Tax Authority allows otherwise.
When the shares are sold, the investment amount is deducted from their cost for capital gains tax purposes.Re-investment “rollover relief”:
An individual investor may defer Israeli capital gains tax if that person sells shares in an Israeli preferred technology enterprise company and reinvests the proceeds in an R&D Company.
The reinvested amount is deducted from the consideration for the old investment and the cost of the new investment. This is sometimes called “rollover relief.”
Various conditions apply. In particular, the re-investment must occur within four months before to 12 months after signing to sell the old investment, or 12 months after receipt of the sale consideration if the Tax Authority approves this. The deduction cannot exceed the inflation-adjusted gain from the old investment nor NIS 5.5m. The allotted (new) shares must be held at least 6 months. An individual cannot claim both the investment tax credit and rollover relief.
Amortizing investment in tech company:
An Israeli corporate investor with a preferred technological enterprise may amortize evenly over five years the cost of acquiring a qualifying tech company. Numerous conditions apply. In particular, the amortization cannot exceed the annual increase in technology revenues.
In the case of an Israeli tech company 80% control must be acquired within 12 months pursuant to an agreement and 10%-25% paid by the end of 2026.
In the case of a foreign tech company, its R&D expenditure in the preceding year must generally exceed NIS 20m. and 7% of revenues; and its business must be “attached” as a going concern to the Israeli acquirer’s Israeli preferred technological enterprise within 12 months of acquiring control. This includes transferring intellectual property (IP) to the acquiring company. Average annual revenues of the acquirer must be at least NS 75m. in the preceding three years. The net acquisition amount must be at least NIS 20m. Approval must be requested from the Israeli Innovation Authority and the Israeli Tax Authority must be notified within various time limits.
Comment: The IP transfer may trigger immediate foreign capital gains tax.
The amortization claimed reduces the cost of any future sale of assets, shares or royalties paid for Israeli tax purposes.
Withholding tax:
Loan interest paid by private privileged tech companies to foreign financial institutions may be exempt from withholding tax if various conditions are met.
Comments:
The previous Angels Law was rarely used mainly due to many bureaucratic conditions. Unfortunately, the new law suffers the same malaise.
Will 17% VAT apply to foreign IP and foreign financial institutions??
The tax breaks relate to Israeli tech companies. Currently, it seems 70%-80% of Israeli start-ups are being incorporated abroad due to the judicial reform crisis.
Foreign investors still have to pay taxes in their home country.
Conclusion: Not perfect, care needed.
As always, consult experienced tax advisors in each country at an early stage in specific cases.
The writer is a certified public accountant and tax specialist at Harris Consulting & Tax Ltd.