Boosting Growth: New Tax Exemption on Interest Income for Global Banks Lending to Israeli Tech Companies
31 August 2023
Israel has recently introduced a new tax exemption for interest on loans from non-Israeli financial institutions to certain Israeli private and public technology companies. This tax exemption is part of a broader package of tax benefits granted under a new law to Israeli technology companies and their investors (you can find more details in our clients update >> here).
The tax exemption applies to loans granted until December 31, 2026, and covers interest, original issue discount, linkage to the Israel consumer price index, and FX differences.
Below is a high-level summary of the key applicable requirements:
1. Lender Specifics:
- Non-Israeli financial institution (bank, insurance company, etc.) resident of a country with which Israel has signed a tax treaty.
- Neither the lender nor its affiliates (as defined in Israeli tax law) have an Israeli permanent establishment or an Israeli subsidiary that extends loans within Israel.
2. Borrower’s Eligibility:
- Israeli company that qualifies as a “Preferred Company” that has “Preferred Technological Enterprise” (as such terms are defined under Israeli tax legislation).
- One of three alternatives is satisfied: (i) for private companies – at least 5% of the shares are owned by Israeli residents during the year that preceded the loan grant date, (ii) for companies listed on a non-Israeli stock exchange, 5% of the unlisted shares are Israeli-owned at the end of the quarter that preceded the loan grant date, or (iii) companies that are listed on the Israeli stock exchange.
- Its technological income in the tax year preceding the receipt of the loan is more than NIS 30 million.
- The Israel Tax Authority must be notified of the borrower’s election to utilize this exemption in the tax return submitted for the first tax year in which interest on loan was paid.
- During the term of the loan, no significant decrease in either the Israeli employee headcount or wages paid to its Israeli employees occurs within the borrower’s “Preferred Technological Enterprise”.
3. Relationship Context:
The borrower and lender are not related parties (generally, no 10% affiliation) beginning four years prior to tax year in which the loan was granted and throughout its term.
4. About the Loan:
- The principal amount should be at least USD 10 million (or the equivalent in other currencies).
- Loan terms are agreed upon, and funds are transferred, between July 31, 2023, until December 31, 2026.
- Loan proceeds must be used for operational activities (which includes, for this purpose, acquisitions of other companies).
The borrower’s annual tax returns during each year within the term of the loan must be accompanied by an accountant’s approval, confirming that all conditions for said tax exemptions were met.
Non-compliance with certain requirements could result in the borrower being retrospectively billed for the tax it failed to withhold from interest payments.
Undoubtedly, this is a significant game-changer which opens ample opportunities for both international lenders and tech companies alike. Should you have any questions or would like to further explore the issues discussed above, our team is ready to provide its insights and support.