Alphabet, the parent company of search giant Google, is reportedly on the final straight towards buying Israeli cloud security company Wiz for $23 billion. Data published in the US shed light on the main winners from the deal, most of whom are overseas residents who will be exempt from paying full tax in Israel. So who will pay what?
Why will Wiz pay less tax than normal?
Wiz was registered from the outset, in 2020, as a US company, with the New York head office as the parent company that holds the development center in Tel Aviv as a subsidiary. Unlike many Israeli companies, the company decided to keep all of its intellectual property in the US, under the US company Wiz Inc. Even if Google, or any other US company, buys it, Wiz will save having to pay tax on transferring intellectual property out of Israel, amounting to 23% of its estimated value.
In another large acquisition by Google in Israel, that of navigation app company Waze a decade ago, the tax paid on the transfer of intellectual property out of Israel amounted to NIS 800 million, much more than the capital gains tax paid by the Israeli shareholders, which came to NIS 400 million.
Why was it worthwhile for the founders not to hold more than 10%?
According to a report on US website "The Information", the four Israeli founders of Wiz - CEO Assaf Rappaport, Yinon Costica, Ami Luttwak and Roy Reznik - hold 9.5% of the shares in the company each, their holdings having been diluted below 10% in the past year. The value of their holdings, on the basis of a $23 billion acquisition price, is thus $2.2 billion each. It may be, however, that preference shares held by the large venture capital funds will dilute their holdings in the calculation of the exit, which could leave each of them with about 5% "only".
Assuming that they keep their stakes at the higher level, they will pay capital gains tax at 25%, plus a surtax of 3% imposed on income of more than NIS 722,000. The tax rate could however be higher, at 33%, in the light of the fact that their holdings were diluted from 10% to 9.5% in the past year. Adv. and CPA Racheli Guz-Lavi , a tax specialist at Amit Pollak Matalon & Co., explains that owners of 10% or more of the shares in a company, or shareholders with the right to appoint directors, pay a higher rate of capital gains tax, of 33%. The higher rate also applies if the shareholding was at the relevant level in the last tax year.
According to the latest reports, who are the big winners from the sale?
Four foreign venture capital firms - Index Ventures, Sequoia Capital, Insight Partners, and Greenoak Capital - and one Israeli firm - Cyberstarts - will share $7 billion. According to "The Information", the largest shareholder is US-British VC firm Index Ventures, with an 11% stake, worth $2.53 billion at the reported acquisition price. Most of the money received by the foreign venture capital funds will be exempt from tax in Israel, as the limited partners in these funds are almost all overseas residents. All the managing partners in the funds, however, both Israeli and foreign, are liable to tax in Israel, at varying rates
The Index Ventures partner who manages the investment in Wiz is Shardul Shah, who knows Israeli companies well. He is also a director of Dazz, another Israeli cybersecurity company, which has several shareholders in common with Wiz, and of content platform Outbrain.
Other large shareholders are: Sequoia Capital, which has a 10% stake, worth $2.3 billion at the reported deal price, and which is represented on the Wiz board by veteran partner Doug Leone; and Insight Partners, which used to be the most active investor in Israeli high-tech, with a 9% stake worth $2.07 billion, and which is represented on the Wiz board by its founder, Jeff Horing. Since only 42% of the shares in Wiz are held by Israelis, most of the profit on the sale of the company will go to overseas players, and will be subject to reduced rates of tax.
The partners in Insight Partners will also pay reduced rates of tax, since it’s a foreign firm with most of its activity in the US. Horing, who brought Insight Partners to Israel with an initial investment in website building platform Wix two decades ago, could pay tax of 15% in Israel, if the company being sold is viewed as a company connected to Israel, that is, a company with most of its assets, directly or indirectly, located in Israel.
How much tax will be paid by the Israeli partners in the overseas funds?
Partners such as Liad Agmon in Insight Partners and Israeli partners in Lightspeed Venture Partners are unconnected to Wiz, but could benefit from participation in the funds’ success fees. Even if they don’t sit on the company’s board of directors, their status a partners entitles them in principle to benefit from the fund’s earnings on the sale of the company. "Although these are foreign venture capital funds, the Israeli managing partners, who could share in 20% of the gain on the sale of the company, are liable to tax of 28% to 50%, depending on the mix of foreign investors in the fund. The larger the proportion of foreign investors, the lower the rate of tax," says Guz-Lavi.
How much will investors such as Shlomo Kramer and Nir Zuk make?
According to the report in the US, Cyberstarts, an Israeli venture capital firm founded by Israeli Gili Raanan that has as its original investors senior people from the cybersecurity industry such as Rakesh Loonkar, Mickey Boodaei, Shlomo Kramer, Armis Security founders Yevgeny Dibrov and Nadir Izrael, and Wiz CEO Assaf Rappaport himself, holds shares in Wiz worth $920 million, after investing just $30 million.
This apparently means a dream exit of tens of millions of dollars for each of the limited partners, who will receive back their investment in the fund, plus 80% of the gain on the sale. Raanan, the general partner in the fund with two other partners, will benefit from double-digit success fees and will pay a tax rate of over 28%, since most of the investors in the fund are Israelis.
Published by Globes, Israel business news - en.globes.co.il - on July 17, 2024.
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