Your Taxes: New Angels Law in Israel

 The start-up nation offers investors a tax break for investing in its hi-tech startups.

The original 2011 version was unsuccessful as too many conditions had to be met. So on January 20, the Knesset passed an amendment aimed at making things a little easier. It is tucked away in the Amendent to the Economic Policy Law for 2011 and 2012 Legislative Amendments, 2011.

The amendment add Start-Up companies and allows partnerships to qualify for the tax break.

Below are brief highlights of the law as amended.

What is on offer?

An Israeli tax deduction may be allowed to individual investors, or individual partners in  a partnership, regarding qualifying investments of up to NIS 5 million made by December 31, 2019 in a “Target Company” or a “Start-Up Company”, as defined (see below).

The investment must be in shares allotted (issued) by the company.

The deduction is spread over a three year “benefit period” commencing with the tax year in which the investment is made. The investor must hold the investment throughout that benefit period (partners in a partnership cannot change their share of the partnership in the benefit period.

Start-Up Companies:

A Start-Up Company must meet the following conditions, among others:

  • Israeli: Incorporated, controlled and managed in Israel;
  • Timing: The investment is made within 48 months after incorporation, or 60 months if it operates in Development Area A (according to the Law for the Encouragement of Capital Investments), OR the investment is made within 12 months after receiving government aid for start-ups, whichever is later.
  • Revenues: Total revenues from incorporation to the investment may not exceed NIS 4.5 million, nor NIS 2 million per year in each preceding tax year, or part of a year;
  • Expenses:  Total expenses from incorporation to the investment did not exceed NIS 12 million, nor NIS 3 million per year in each tax year, or part of a year preceding the investment;
  • Investment: Total investment in the shares from incorporation to the investment did not exceed NIS 12 million, including the qualifying investment contemplated;
  • Confirmed: An Israeli certified public accountant confirms the above conditions are met;
  • R&D: 70% of expenses since incorporation to the investment were incurred in a product based on R&D conducted by the company. Such a product can be tangible or intangible, a process or a service, including production processes and computer software. The resulting product in development and all the rights derived from it (=intellectual property) must be owned by the company. This condition is deemed met if individual(s) or various institutions (university, research institution, hospital, company that commercializes such products, agricultural institution, etc.) transferred all their rights in the product to the company.

Target Companies:

A Target Company must meet the following conditions, among others:

  • Not publicly traded;
  • R&D: 75% of the amount invested is spent on R&D by the end of the benefit period. Until then at least 70% must be so invested each year.
  • 75% of such money must be spent in Israel;
  • Revenues: In the year of investment and the following year, revenues of the company may not exceed 50% of R&D expenditure;
  • Purpose: Throughout the benefit period, the R&D is devoted to promoting the company’s plant;

Other rules:

Upon a sale of a qualifying investment, the amount already deducted shall be deducted (i.e. recaptured) from the cost of the investment for Israeli capital gains tax purposes.

The National Technology Innovation Authority will check compliance with various aspects annually and two years after the end of the benefit period.

Tax avoidance or improper tax reduction must not be a principal objective of the investment. This appears to mean the tax break must not be claimed in an abusive way – perhaps by hiving off a start-up from an existing company….


The sale recapture rule is irrelevant to foreign investors. Instead they may enjoy a double whammy: a tax write-off when they invest and an exemption from Israeli capital gains tax when they sell their investment.

But the deduction is useful to foreign investors only if they have other Israeli source income in order to utilize the deduction.

To sum up, the amended tax break for angels will still not be easy to claim, time will tell if it is realistic.

As always, consult experienced tax advisors in each country at an early stage in specific cases.

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The writer is a certified public accountant and tax specialist at Harris Consulting & Tax Ltd.

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