The Ministries of the Economy and Finance have announced an amendment to the Tax Benefits for Individuals Investing in R&D Companies Law (the Angels Law) encouraging private investors to invest in startups at the seed stage. The original law, enacted three years ago, was severely criticized from the start, and produced only 125 requests for investment approval, some of which were never used, according to Ministry of the Economy Chief Scientist Avi Hasson.
The amendment allows investors to recognize 100% of their investment for tax purposes in the first year after the investment, in contrast to the current situation, in which the investment is recognized for benefits over several years, and only if the company has not emerged from its startup status in the meanwhile. The idea was that the company's success would justify the investor's investment for him, and no benefit was therefore necessary. In practice, however, it was found that there was no connection between reaching the sales stage, for example, and an investment return for an angel investor. A conflict of interest was also created between the investor and the company, because the investor might seek to delay reaching the sales stage in order to obtain his benefit. When making their investment, the investors did not know whether they would receive the benefit, which was the principal deterrent.
The cost of the amendment to the tax authorities is estimated at $50 million annually, part of which will be regained through income tax on salaries and other indirect taxes paid by the companies.
Minister of the Economy Naftali Bennett said, "Following the amendment, the current law is the world's most daring and aggressive angels law. I don't know of any other country that recognizes 100% of an investment for tax purposes in the first year. The purpose of the law is not to encourage angels with experience in the high-tech industry; it is designed to encourage investment in high tech by a contractor, diamond merchant, or dentist with available money who is looking for a higher return. It is true that some of the investments will not succeed, but an unsuccessful high tech company is a good thing, not a bad one, because innovation is created, and people are trained and will establish another startup. It's not like an unsuccessful grocery store, which is a bad thing."
According to Bennett, the amendment's possible additional peripheral advantages include the creation of systems for rating and assessing startups for inexperienced angels, and perhaps also the channeling of capital to high tech, instead of real estate investment.
Published by Globes [online], Israel business news - www.globes-online.com - on July 16, 2014
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