“The Angels Law”

Last week, the Knesset finally approved the law to encourage knowledge-intensive industry (temporary order), 2023 (the “Temporary Order”). The final version was published in the records on July 31st.

The purpose of the Temporary Order is to encourage the growth of tech companies in Israel by providing various incentives for the acquisition of companies (Israeli and foreign). The Temporary Order is valid from the date of its publication in the records until the end of 2026 (the “Benefits Period”).

See below a concise summary of the main benefits and conditions determined in the Temporary Order, which are available during the Benefits Period:

Benefits for individual’s investment in R&D company – The Temporary Order provides two alternative benefits for an investment of an “Investor” (i.e. an individual, a company under the control of at less than five persons, or a partnership held by such taxpayers) in an “R&D company” (as defined in the Temporary Order), provided that the investor holds less than 25% of the rights in the R&D Company, as follows:

• Alternative 1: Tax credit for the investor – The credit amount will be equal to the amount of the investment in the R&D Company multiplied by the capital gain tax rate (including the surtax) applicable to the investor, limited to NIS 4 million for each R&D Company. An amount of credit that is not used in the tax year may be carried forward to the following years.

• Alternative 2: Tax deferral on an exchange of R&D Company’s shares – Tax deferral of up to NIS 5.5 million real capital gain on the sale of R&D Company shares, provided that additional investment is made in another R&D Company in the period between 4 months prior to the sale and 12 months following it. The benefit is conditional on holding the shares for at least 6 months.

Share Depreciation for a preferred technological company that acquires shares of a company engaged in R&D – A preferred company with a technological enterprise is eligible to deduct the “Net Purchase Amount” (an amount reflecting the value of acquired company’s intangible assets) for the acquisition of 80% or more of the shares of a company engaged in R&D (Israeli or foreign), as detailed below:

• The acquisition can be carried out in parts during a 12 month period.

• The Net Purchase Amount will be deductible for a period of 5 years in equal instalments.

• The deduction can be used against preferred technological income only.

• Intangible assets and the bulk of the business activity of a purchased foreign company (whether the acquired company or a foreign subsidiary of an Israeli acquired company) should be transferred to the technological enterprise of the acquiring company and will remain in its ownership until at least the end of the deduction period (the “Transferred Assets”). Amounts paid for the Transferred Assets, or their rights (such as royalties) will not be deductible by the acquiring company.

• The technological activity of the acquiring company will not be reduced during the deduction period, and its employees’ number/wages will not decreased by more than 20% (excluding global situations) in the deduction period.

• The acquired company (if Israeli) should be classified as a preferred company with a technological enterprise or an R&D company (as defined in the Temporary Order).

• If the acquired company is a foreign company, the following conditions should be met:

  • The acquiring company has an average Technological Income of at least NIS 75 million in the three years preceding the acquisition.

  • The Net Purchase Amount is at least $20 million.

• The annual permitted deduction is limited to the amount of the revenue increase of the buying company comparing to its revenue in the year prior to the year in which control has been achieved.

Exemption from withholding tax on interest paid by a “Qualifying Entitled Company” on a loan from a foreign financial institution - No withholding tax will apply on interest paid by an Israeli company to a “Foreign Financial Institution”, provided that the following conditions are met, among others:

• The Foreign Financial Institution is a resident of a reciprocating country, and it does not have a permanent establishment for lending in Israel.

• The borrowing company is a Preferred Company with a Preferred Technological enterprise of which at least 5% of the shares are held by individuals who are residents of Israel, and whose Technological Income in the year preceding the grant of the loan exceeded NIS 30 million.

• The Foreign Financial Institution does not hold 10% or more of the rights in the Qualifying Entitled Company.

• The loan amount is at least $10 million, and it is intended to finance the activities of the technological enterprise, including the acquisition of companies, assuming that its activity in Israel will keep its volume during the loan period.

Extension of the benefit to private investment in an IPO of an R&D company – A private investor in an IPO held in the Tel-Aviv Stock Exchange of a company engaged in R&D, is entitled to recognize up to NIS 5 million capital loss at the amount of the investment in the issuing company. Currently, the benefit is relevant, among other conditions, to a company which its FMV is greater than NIS 200 million. The Temporary Order extends the benefit to apply also for issuing companies valued at NIS 100 million only.

The information provided in this article is solely for informational purposes and should not be construed as advice. Our firm is at your disposal for further consultation.