Gov't proposes new tax breaks for early-stage tech investors

Orit Farkash-Hacohen credit: Cadya Levy

The cost of the measures to the taxpayer is estimated at NIS 320 million over four years.

A series of planned legislative amendments benefitting Israel's technology industry failed to make it into the Economic Arrangements Law accompanying the budget passed last year. The government is now reintroducing them through a regular legislative process. Today, the ministerial legislation committee will discuss amendments already agreed between Prime Minister Naftali Bennett, Minister of Finance Avigdor LIberman, and Minister of Science, Technology and Space Orit Farkash-Hacohen. If the legislation committee approves them, they will have coalition support in the Knesset.

In the Bill for the Encouragement of Knowledge-Intensive Industry, the loss of tax revenue to the state as a result of the implementation of the amendments concerned is estimated at NIDS 65 million in 2022, NIS 75 million in 2023, NIS 85 million in 2024, and NIS 95 million in 2025.

In other words, the cost is NIS 320 million over the four years in which the regulations will apply as a temporary ordinance, after which period they will be reviewed by the government. A small amount of the funding, NIS 15 million in 2024 and NIS 25 million in 2025, is due to come from a reduction in the budget of the Innovation Authority, or from other balancing measures.

Return of the "Angels Law

The most controversial amendment relates to the "Angels Law". This was a temporary ordinance in force from 2012 until 2019. The government is now bringing it back in expanded form. Under the proposed amendment, early-stage investors in startup companies will receive a tax credit amounting to 25% of the amount they invest, for an investment of up to NIS 3.5 million.

To be recognized for the purposes of this tax benefit, an investment must be in a startup company at an early stage that has not received more than NIS 12 million in investment and whose annual revenue is not above NIS 12 million. It goes without saying that the investors who benefit from this tax break will be multi-millionaires, as it is they who generally make private investments in startup companies.

Alternatively, in a new measure, investors will be able to defer the payment of tax on capital gains from the sale of a technology company if they reinvest the money in early-stage startups. Thus an investor who sold his or her stake in one startup company when the company made an exit will be able to transfer the proceeds to investment in another company without paying tax on them. If the second company fails, the state has in effect subsidized part of the investor's loss by deferring the tax.

This section has been criticized on the grounds that the ability to defer tax payments on gains does not exist in any other field of investment, and the benefit will go to the pockets of investors who are in any case among the wealthiest people in the country.

A third amendment allows Israeli technology companies to recognize for tax purposes the cost of acquiring another technology company, Israeli or foreign. The cost of the investment in the other company will be recognized as an expense for tax purposes in equal annual amounts over five tax years following the acquisition of control.

Finally, a further amendment gives a tax exemption to a foreign financial institution on income from interest, discounting, or linkage differences paid to it by an Israeli technology company as repayment of a loan. The aim is to reduce the cost to technology companies of obtaining credit from foreign financial institutions.

The general aim of the amendments is to strengthen the technology industry, which is seen as the engine of the economy, although it should be pointed out that they come at a time of unprecedented prosperity and growth for local startup companies. According to an IVC report for 2021, Israeli technology startups raised $25.6 billion that year, almost 2.5 times as much as they raised in 2020 and more than three times as much as they raised in 2019. This growth found its way into the pockets of startup investors, who have posted record returns on their investments in the past two years.

Specifically, the amendments are intended to aid young startups, in the light of a continuing decline in the number of technology companies founded in Israel each year, according to Central Bureau of Statistics data. Here too, however, the figures do not necessarily indicate a market failure necessitating government intervention or aid. According to IVC, for example, the number of seed-stage investment rounds by Israeli companies was 102 in 2021, up from 72 in 2020 and 82 in 2019. The average investment amount received by Israeli companies at the seed stage also rose, from $3 million in 2020 to $4 million in 2021. "After a slight decline in 2020, seed investors raised their investments, particularly Israeli investors.," IVC's report finds.

Published by Globes, Israel business news - - on April 3, 2022.

© Copyright of Globes Publisher Itonut (1983) Ltd., 2022.

Orit Farkash-Hacohen credit: Cadya Levy
Orit Farkash-Hacohen credit: Cadya Levy
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