Written by Doron Mutai
The Israeli parliament has enacted last Thursday the Law for Encouragement of Knowledge-Based Industry (the “Law”), which was promoted by the government and is broadly known as the “Angel’s Law”. The following is a general overview of this legislation.
The Law was enacted as a replacement of preceding legislation that expired four years ago, where the explanatory statement that is attached to it addresses that it aims at providing certain incentives for the growth of Israeli hi-tech companies that hold their intellectual property in Israel and the substantial part of their activity is performed from Israel.
The Law defines an “R&D Company” as one that, among other things, its annual turnover is lower than NIS 4.5M and the total amount of the funds it raised does not exceed NIS 12M (including loans); at least 20% of its employees are considered as R&D employees; its R&D expenses are at least 7% of its income; and at least 70% of its expenses since the incorporation until the end of the last tax year were spent on the development of an intangible asset that is based on R&D that was developed by that company.
The Law seeks to encourage investment in start-up companies, through two different instruments:
The first, is a tax credit to private investors on an investment of up to NIS 3.5M in return for shares in an R&D Company. The credit equals the sum of the benefiting investment (as defined) multiplied by the tax rate that would have applied to the investor upon realization of the investment. The credit amount could be used against the investors’ tax liability in the year of investment and could be carried forward to the following years if it were not utilized in a certain tax year. Consequently, the actual amount of investment is reduced. Note, however, that the credit amount would be reduced from the cost basis that the investor has in the shares. Hence, the gain from a future sale would be higher at a respective amount.
The second, allows a deferral of the tax that applies to capital gains from realization of investment in a start-up company (the Law provides certain characteristics for such a company), of up to the amount that was used by the seller to investment in an R&D Company within twelve months. Consequently, the tax on the gain is deferred until realization of the other investment or dismissed – if the other investment does not materialize.
Another provision of the Law aims at encouraging the acquisition of technology companies (either Israeli or non-Israeli companies) by Israeli technology companies. Such an acquisition is encouraged through a relatively exceptional provision that allows amortization of the acquired shares over a five-year period (a similar provision was introduced by the previous Angels Law, albeit only with respect to Israeli companies). In case of acquisition of non-Israeli companies, the Law requires that the business of the acquired company would be imported and combined into the business of the acquiring Israeli company.
An additional incentive that is introduced by the Law relates to fund raising from financial institutions. In light of the difficulties that early-stage companies face when they are seeking for funding, the Law aims at encouraging non-Israeli financial institutions to extend loans to Israeli companies, by applying an exemption from Israeli income tax on the interest (as well as on income form discount on the loan and from foreign exchange gains).
Please note that the Law includes various defined terms and addresses plenty of technical orders, which have been brought to you on a high-level basis. Our tax experts would be happy to address any question that you may have.