Dear Clients, Colleagues and Friends,

 

Background – The New Law, its Purpose and the Benefits it Offers

 

On July 25, 2023, a law granting significant tax benefits aimed to bolster the high-tech industry was passed in the Israeli Parliament.

 

This law is designed to strengthen the Israeli high-tech industry by granting Israeli high-tech companies and their investors various tax incentives. The law is based on a legislation memorandum published at the end of 2021 (you can find more details in our clients update >> here).

 

The law offers several different benefits:

(1)  Tax credit for an Individual investor (or a group of individuals) based on the investor’s investment in shares of a high-tech company.

(2)  Exemption for an individual investor from capital gains tax deriving from the sale of shares in a company that is entitled to the Preferred Enterprise tax regime and has a Technological Plant, if the individual invested in shares of another high-tech company in close proximity to the sale (investment rollover).

(3)  Recognition of an Israeli company’s investment in shares in a high-tech company as an expense for tax purposes over a period of five years.

(4)  Tax exemption for interest paid by a high-tech company to a foreign financial institution.

(5)  Extension of the validity of the temporary order allowing – in certain circumstances – the recognition of an investment in shares in listed high-tech companies as a loss, and easing some of the conditions established therein.

 

Each of the benefits is subject to detailed eligibility rules and conditions. In this circular we will review the main points, and we will be happy to further discuss and provide additional details to the extent relevant to you.

 

Validity of the law

 

The law was enacted as a temporary order, which is valid as of the day of its publication and until December 31, 2026. In the discussion in the Parliament, it was said that to the extent that the law achieves its goals, its validity is expected to be extended at the end of this period.

 

First benefit: tax credit for an Individual investor (or a group of individuals) based on the investor’s investment in shares of a high-tech company.

 

This benefit targets individual investors (and investor groups who incorporate in certain companies or partnerships) who invest in a Qualifying High-Tech Company. A Qualifying High-Tech Company is a company, at the seed stage, the meet specific criteria, including Israeli control and management, maximum fundraising of NIS 12 million, capped total income and investment, and a minimum proportion of R&D expenses from the company’s income. In order to qualify as a Qualifying High-Tech Company, the company must also own the IP it develops.

 

The benefit allows for a tax credit of up to 33% of the investment amount (in accordance with the capital gains tax rate that would have applied if the investor had sold the shares) against the investor’s tax liability. Unused tax credits can be carried forward to subsequent years. The benefitted investment amount is capped at NIS 4 million per investor per company (net of amounts paid to the investor by the company or investments of the investor’s relative for which benefits were utilized under the law).

 

It should be noted that if the company does not meet certain conditions during the “benefit period” (the period from the beginning of the tax year in which the investment is considered to have been made for the purpose of the law, until the end of three years from such date), the tax credit will be canceled retroactively, and the investor will be required to pay the resulting tax liability. In some cases, the tax authority will be entitled to collect the investor’s tax liability from the company, provided that it will not collect the tax from both the company and the investor.

 

It is important to emphasize that at the time of the sale of the company’s shares by the investor, the amount of the investment for which the investor received a tax credit, will be reduced from the original price of the shares sold, resulting in higher capital gain within the sale.

 

Second benefit: exemption for an individual investor from capital gains tax deriving from the sale of shares in a company that is entitled to the Preferred Enterprise tax regime and has a Technological Plant, if the individual invested in shares of another high-tech company in close proximity to the sale (investment rollover)

 

This benefit is offered only to a single investor (namely, it will not be given to an incorporated investors group), who sells shares in a preferred company that owns a technology plant, in close proximity to an investment made in a high-tech company at the seed stage that meets certain conditions (similar to the conditions stated above in relation to a Qualifying High-Tech Company, but more lenient). In order to be entitled to the benefit, the investor must make the additional investment in the period starting four months before the sale of the shares and ending one year after the sale, and hold the shares for a significant period (six months from the date of the investment for the purpose of the law or until three years from that date, if the sale is to a relative of the investor).

 

The benefit allows investors to perform an “investment rollover,” meaning they can defer the tax event and the tax liability on the capital gain resulting from the sale of the shares until they sell the shares received as part of the investment made at close proximity to the sale. The amount of capital gain that the investor may defer is limited to the amount of the payment the investor paid in cash as part of the investment, but no more than NIS 5.5 million (minus amounts the investor received from the company or other investments of the investor or the investor’s relative in the same company for which benefits under the new law were claimed).

 

It is important to emphasize that it is not possible to claim both the first benefit and the second benefit for the same investment, but one must choose (an irrevocable choice) which of these two benefits to take advantage of.

 

Third benefit: recognition of an Israeli company’s investment in shares in a high-tech company as an expense for tax purposes over a period of five years

 

Unlike the first two benefits, this benefit is not offered to individuals but rather to Israeli companies entitled to tax benefits as Preferred Technological Enterprises, which purchase at least 80% of the means of control in high-tech companies. The target company can be Israeli or foreign, at the seed stage or more mature, subject to the specific conditions that apply for each type of company.

 

It is important to note that in the case of the acquisition of a foreign company the conditions for qualifying for the benefit are significantly stricter than in the case of the acquisition of an Israeli company and include, among other things, a requirement to transfer all the activities and assets of the target company to the ownership of the acquiring company, a minimum purchase amount of USD 20 million and obtaining an approval from the Israeli Innovation Authority that the purchase is expected to be used for the promotion or development of the Israeli Technological Enterprise of the purchasing company. In addition, in the case of the acquisition of a foreign company, the acquiring company will only be entitled to the benefit if it had Technological Revenue of at least NIS 75 million on average, in the three years preceding the acquisition, and if it did not reduce the scope of its activities in Israel in the years following the acquisition.

 

Subject to meeting the qualifying conditions, the acquiring company will be allowed to deduct the purchase price of the acquired company as an expense, over a period of five years, against its Technological Income.

 

The amount of the expense deducted by the acquiring company in accordance with this benefit will be reduced from its original price in the acquired company’s shares. Also, the acquiring company will not be allowed to recognize as an expense the amounts it pays to the target company for the use of its knowledge or assets. It should also be noted that failure to meet the eligibility conditions may negate the tax deduction in some years, and in some cases even retroactively negate the entire eligibility for the benefit, in a way that will require the acquiring company to repay the benefit it received.

 

Fourth benefit: tax exemption for interest paid by a high-tech company to a foreign financial institution

 

This benefit is intended to make it easier for established Israeli companies seeking to receive significant loans from foreign financial institutions. This, by way of granting a tax exemption to foreign entities on the interest paid by an Israeli company in respect of such loans. The exemption will apply to interest, discount fees and linkage differences. The benefit is aimed to reduce the financing costs of the Israeli high-tech companies that currently bear the cost of grossing-up the tax on the interest paid to foreign lenders.

 

Israeli companies with a Preferred Technological Enterprise and a significant Technological Income (over NIS 30 million in the tax year preceding receiving the loan) are eligible for the benefit, and it applies to loans over USD 10 million that are intended to finance the company’s ongoing activities (including the purchase of companies). This benefit is also subject to various eligibility conditions (such as the absence of a reduction in the scope of the borrowing company’s activity during the loan years) and failure to comply with them will result in the company being charged retroactively with the tax that was not paid by the foreign lender.

 

Fifth benefit: extension of the validity of the temporary order allowing – in certain circumstances – the recognition of an investment in shares in listed high-tech companies as a loss, and easing some of the conditions established therein

 

Lastly, the law extends the validity of Section 92A of the Income Tax Ordinance, which was legislated as a temporary provision in 2016, until December 31, 2028, and eases some of the conditions established therein. Section 92A allows the recognition of an investment in shares as a loss at the time of the investment, in the case of an investment in research and development companies the shares of which are listed on the stock exchange.

 

It should be noted that each of the benefits reviewed above are subject to a variety of conditions and limitations that are not detailed in this update.

 

The law offers significant benefits for high-tech companies at various stages and their investors. Accordingly, it is recommended that companies and investors include the benefits provided under the law as part of their considerations when they carry out strategic planning on various issues such as the date of recruitment, the date of taking loans, and the date of execution of merger and acquisition transactions. The tax department of our office will be happy to assist you in these matters.

 

Sincerely,

Tax Department

Herzog Fox & Neeman

 

Meir Linzen | Chairman Chairman of the firm and Head of Tax Department​ ​linzen@herzoglaw.co.il	Guy Katz | Partner Tax Department katzg@herzoglaw.co.il
Yuval Navot | Partner Tax Department navoty@herzoglaw.co.il	Ehab Farah (DR.) | Partner Tax Department farahe@herzoglaw.co.il
Amir Cooper | Partner Tax Department cooperam@herzoglaw.co.il	Ronen Avner | Partner Tax Department avnerr@herzoglaw.co.il