Proposed Legislation Offers Tax Benefits to High-Tech Companies and High-Tech Investors
3 November 2021
Dear Clients, Colleagues and Friends,
The Ministry of Justice of the State of Israel recently published a memorandum for a new law to incentivize the Israeli high-tech industry (the “Memorandum“). The proposed legislation aims to strengthen the Israeli high-tech industry by way of extending certain tax benefits to Israeli high-tech companies and investors in such companies.
Below we provide an overview of the key benefits included in the Memorandum which should be considered even prior to the enactment of such legislation, due to the potential implications it may have on strategic events relevant for impacted companies such as merger and acquisition transactions, funding rounds, financing transactions, and more.
If enacted, the legislation would apply for a temporary period of four years, between January 1, 2022 and December 31, 2025, following which the Israeli government would evaluate the implementation of the proposed legislation and examine the possibility of its extension in light of the objectives achieved.
The Memorandum introduces two types of benefits to investors in a newly established Israeli high-tech company (until the seed stage) that meets certain conditions, including: it is managed and controlled from Israel, has not raised more than NIS 12 million in funding, its income did not exceed a certain threshold and it is the owner of the IP it develops (a “Benefitting Company“).
First, the Memorandum allows an investor to credit up to 33% of his/her/its investment amount against the Israeli tax liability. The Memorandum limits the investment amount eligible for this benefit to an aggregate of NIS 3.5 million per investment of the investor in a specific company. It should be noted that if the company fails to meet certain conditions over the course of three years following the investment, the tax credit is canceled retroactively and the investor will be required to pay the applicable tax. This benefit is available mainly for individuals, but may also apply to certain partnerships and private companies.
The second benefit under the Memorandum applies only to individual investors and allows an investor to roll-over investments, resulting in the deferral of the payment of the tax liability arising from the capital gains generated from realizing an investment in a Benefitting Company, subject to the consideration from such sale being invested in an R&D company which is in the seed stage.
In addition, the Memorandum allows Israeli companies that benefit from the Israeli Preferred Technological Enterprise tax regime to amortize the acquisition costs of certain high-tech companies. The proposed amortization period is five years, during which the acquiring company will be allowed to deduct the acquisition cost. It is noteworthy that the acquired company may not necessarily be Israeli, but also non-Israeli, so long as the IP of such non-Israeli company is transferred to Israel within one year following the acquisition.
The Memorandum proposes to exempt non-Israeli financial institutions from tax on their interest income from loans in a principal amount of USD 10 million or more which were extended to Israeli high-tech companies that are in advanced growth stages (i.e., companies with technological income exceeding USD 10 million in the year prior to the year in which the loan was extended). The exemption would apply to interest, discount and consumer price linkage differentials. The exemption would reduce the financing costs of Israeli high-tech companies that currently bear such costs due to standard gross-up provisions that require such companies to gross-up for Israeli taxes payable by non-Israeli lenders.
Lastly, the Memorandum proposes to extend Section 92A of the Income Tax Ordinance which provides benefits similar to those under the Memorandum, with respect to investments in R&D companies that are listed on a stock exchange.
We note that the tax benefits discussed above are subject to various conditions and limitations that are not detailed herein and should be considered as well.
The Memorandum includes significant benefits to high-tech companies in different stages and to investors in such companies. It is therefore advisable to consider strategic planning in various matters, such as timing of fund raisings, financing transactions and the execution of merger and acquisition transactions. Our tax department has extensive experience in these matters and would be happy to assist you as needed.
The Tax Department
Herzog Fox & Neeman