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Tax Benefits for Private Investors in Innovation, Israeli Angels Law

13/04/2021

The amendment to the Angels Law, a “Start-up company”; the State of Israel provides significant tax benefits to private investors in young R&D companies. Tax benefits for private investors in innovation to drive the R&D field. According to the Israeli Tax Authority: this unique legislation is exceptional in tax law

Tax Benefits for Private Investors in Innovation

The Angels Law refers to private investors (Angels). If you own private capital and consider investing in innovative start-up companies, technology companies or innovative projects, the amendment of this law might be relevant to you. The amendment provides you with an opportunity to invest and receive a significant tax benefit on your investment.

This policy of the State of Israel is supposed to support and encourage private investors thereby pushing forward the R&D field.

Why Does the State of Israel Provide Tax Benefits to Private Investors?

Investments in intensive knowledge R&D Israeli companies, in the initial phase of their research and development activities, carry a high risk to the investor.
Therefore, to increase the funding sources and extend funding for these companies, the Israeli tax authorities provide a significant incentive in the form of tax benefits to private investors. This incentive is expressed in deducting the amount of investment from their ongoing expenses.
This is a rare and unusual move, since in most cases of investing money, the invested funds does not save you taxes or can be offset from the income sources.
However, the current benefit allows the deduction of investment as a current expense, thus reducing the investor’s tax payments.

The Amendment to the Angels Law

The amendment to the law added a new benefit route, in addition to the existing route, such that currently there are two possible routes for private investors to receive tax benefits:

  1. “Target Company”: This route was enacted in 2012. Under this route companies that have been approved and defined as a “Target Company” can raise capital from investors and the investment will be considered “an expense” in the investor’s annual report.
    This allows the investor to enjoy tax savings on the investment.
    The process for achieving approval and recognition as a “Target Company” is complex and comes as an obstacle as the requirements are high and hard to comply with. This fact makes it difficult for both the company and the investor since the company struggles to obtain an approval while the investor has no certainty regarding feasibility and tax saving.
  2. “Start-up Company”: The amendment of the law from late 2016 and early 2017 defines another route for a “Start-up Company.”
    This route enables a much simpler and shorter process, both in meeting the terms and obtaining the approval.
    This enables immediate certainty of the tax savings that investors will receive on the investment and encourages their investment through this certainty.

The Investor Gets Certainty, the Responsibility is on the Company

One of the rare benefits of the amendment to the law under the “Start-up company” route is the high certainty that investors receive in two ways:

  1. Annual approval: Compliance with the terms of the law is easy to test. The company should produce an annual approval of an accountant to meet the requirements.
  2. Company responsibility: If it transpires retrospectively that the company failed to meet the requirements and the investor used the tax benefit in its final report to the Israeli Tax Authority, the company itself will be liability to return the tax payment to the Tax Authority, so the investor will not be affected.

This kind of legislation is very rare in Israel and abroad, and it lays all the weight of responsibility on the company.

Rate of Tax Benefit

The maximum amount of investment recognized for tax purposes is up to NIS 5 million. The benefit may be realized for the partnership of individuals or a single investor while investing in start-up companies as an investment recognized as an expense that can be offset from the income sources in that tax year for the duration of the benefit period. This is provided that the company has received approval as a “Start-up Company” by the Israeli Innovation Authority and meets all the conditions and requirements under the law.

What Do You Need to Know About “Start-up Company”?

From the perspective of the investor, it is important to know that a company that wishes to become a “Start-up Company” by law must apply for the Israeli Innovation Authority to be recognized as a “Start-up Company”.
Approval of the Innovation Authority depends on meeting the following conditions when you submit the request and for the upcoming three years of benefit:
1. The company was incorporated in Israel and the control and management of the company are in Israel.
2. At least 75% of the company’s R&D expenses, during the benefit period, were spent in Israel.
3. The company’s income did not increase 50% of its R&D expenses in each of the first two tax years of the benefit period.
4. During the benefit period, the company’s R&D expenses were spent to develop and promote a product it owns and not in favor of another company.
5. The scope of investment in the company includes the loans given to it, from the date of its incorporation to the date of investment, including the amount of the entitling investment that does not exceed NIS 12 million.

6. The company’s sales turnover does not exceed NIS 4.5 million from the time it was founded until the date of the application. Also, the sales turnover did not exceed to a total of NIS 2 million in a single tax year.

Investing Can Be Benefitting

To enjoy the benefit, you should first check that the invested company is indeed defined as a “Start-up Company” that received the necessary permits, and meets the requirements of the law.

You should then examine that your investment meets the following basic criteria:
1. The amount of investment that is allowed for a single investor less than any income source does not exceed the cumulative overhead of up to NIS 5 million (in the partnership of individual investors, the investment is examined separately for each investor).
2. Investment date starting from 1/11/2016.
3. A single investor must hold the shares allocated to him in exchange for his entitling investment in the “Target Company” or ” Start-up Company” during the entire benefit period. The benefit period is defined as a period of 3 tax years, which begins with the tax year in which the amounts, which are the entitling investment, were paid.
Preparation of tax returns that include tax benefits and calculation of the tax benefit and deduction to which you are entitled are necessary and important. Assuming you meet all terms, we are here to check and prepare these annual returns for you.

Investors, Steps to Locate Investing Opportunities

Auren Israel’s professional team has the experience and knowledge to assist you to receive the tax benefits on the investment you made according to the law and following the international tax laws and double taxation treaty between the countries. From the selection of the R&D company that qualified for the benefits, through the annual reports and the receiving of the tax benefits. Since we are familiar with both parties, enraptures and investors, we can accompany the whole process, from the connection, through the negotiation on the investment amount to the suitable agreement which will support both sides and will be most productive for you as the investor and for the “Target Company” or “Start-up Company” in which you will invest in. It is an opportunity to use our knowledge to maximize the potential of your investment offshore and to enjoy your benefit on investment in Israel innovation, to support the local R&D and innovation.

Contact our Taxation Department, 03-5333883.