Angels Law – Tax Benefits 2023

The Law for the Encouragement of High-Tech Industry (Temporary Order) 5723-2023, commonly known as the “Angels Law,” was approved by the Knesset on July 26, 2023, and came into effect on July 31, 2023. This legislation provides tax incentives to promote the high-tech industry in Israel. These tax incentives were previously granted as temporary measures at various times starting in 2011 but had not been renewed since 2019.

Since the second half of 2022, high-tech companies in Israel have experienced a downward trend. Therefore, the revival of the Angels Law brings encouraging news for the Israeli high-tech industry.

In this article, we will discuss the tax benefits provided to investors in research and development (R&D) companies.

Tax Benefits Under the Angels Law

The tax benefits governed by this law encompass three primary areas:

1. Benefit for investors: Tax deferral is provided for investors in Israeli start-up companies.
2. Benefit for high-tech companies: Tax reduction is granted to high-tech companies that merge with other high-tech firms.
3. Benefit for “importing” high-tech to Israel: Israeli companies acquiring foreign high-tech companies receive a special benefit.

The primary objective of this law is to encourage investors to invest in Israeli start-ups during their early research and development stages, particularly in the pre-seed and seed stages. Unlike previous temporary provisions, this temporary order simplifies the conditions for receiving tax benefits. For example, unlike the previous temporary order that required preliminary approval from the Innovation Authority to confirm a company’s status as an R&D company, the current temporary order mandates only the approval of an accountant.

Investors who invest in a company meeting the criteria of an R&D company are entitled to receive fixed tax benefits up to the recognized investment ceiling for the credit..

Defining an R&D Company

In order to qualify for the tax benefits outlined in this law, the investing company must satisfy the criteria for being recognized as an R&D company, as specified in section 1 of the temporary order.

According to the temporary order, an R&D company eligible for tax benefits is one that is incorporated in Israel and primarily conducts its operations within the country. Furthermore, the company should not fall under the definition of a subsidiary of multiple companies as outlined in section 76(c) of the Income Tax Ordinance. To qualify, the company must also meet the following cumulative conditions:

1. Private Company – The company has not listed any securities for trading on the stock exchange since its date of incorporation.
2. The conditions in paragraphs (2)-(5) of the definition of a preferred company in section 51 of the Encouragement of Capital Investments Law are fulfilled:

• The company’s control and management are based in Israel.
• The company does not fall under the category of a home company or family company.
• The company maintains proper ledgers and reports in accordance with the law for the same tax year
• Clean Record: Neither the company nor its officials have been convicted of any listed offenses in the decade prior to the tax year for which benefits are sought.

1. Revenue and Technological Revenue: The total technological revenues, from the date of incorporation until the preceding tax year, do not exceed NIS 4.5 million, and the total revenue of the company during that period does not exceed NIS 12 million.
2. Investment and Loans: The total investments in the company and loans granted to it since its incorporation do not exceed NIS 12 million.
3. R&D Expenses: At least 7% of the company’s total revenue, on average per year, in the three years preceding the tax year (or from the date of its incorporation if founded less than 3 years ago) are classified as R&D expenses. Additionally, the company must meet the conditions outlined in subparagraphs (a) to (d) of paragraph (2) of the definition of a “preferred technological enterprise” in section 51D of the Encouragement of Capital Investments Law.
4. Ordinary Company Expenses: 70% of the company’s expenses from its date of incorporation until the end of the year preceding the tax year were allocated for the development, either directly or indirectly, of a beneficial intangible asset through research and development conducted within the company.
5. Ownership of Development Property: The company has owned the property under development, including all associated rights, since its creation. This includes cases where the company received such property for further development.
6. Accountant Confirmation: There is confirmation from an accountant that the company complies with these conditions.

Tax Benefits

The Angels Law offers several tax benefits to encourage investment in Israeli high-tech companies and foster the growth of the industry:

1. Tax credit at the investment stage in the R&D companies – Investors in Israeli R&D companies can receive a tax credit equal to the capital gains tax they would have paid if they had sold their investment. The credit amount is calculated as the investment multiplied by the investor’s applicable capital gains tax rate, up to a ceiling of NIS 4 million.

* This tax credit is granted in the tax year in which the investment is made and can also be redeemed in subsequent years.

2. Tax Deferral in Refinancing Investments – Investors who sell shares in an Israeli R&D company and reinvest the proceeds in another Israeli R&D company within 12 months from the sale date can choose to defer their tax liability. It’s important to note that investors cannot enjoy both the tax credit and tax deferral. They must select one benefit, and this choice is irreversible. Therefore, consulting with professionals is recommended before making a decision.

3. Reduction of Taxable Income in High-Tech Company Mergers: Large technology companies that acquire control of another technology firm can deduct the expense of purchasing shares from their tax liability. This deduction is spread out over five years at equal annual rates, starting from the date of acquisition. This approach eases the financial burden of the investment by allowing deductions as current expenses over time, rather than as a capital gain at the time of realization.

4. Tax Exemption for Foreign Banks and Financial Institutions: Foreign banks and financial institutions providing financing to Israeli high-tech companies are granted exemptions on various financial aspects, including interest income, linkage differentials, and discounting fees on loans. This exemption aims to reduce the financial burdens that Israeli high-tech companies face when obtaining financing from foreign entities, which typically impose taxes on the borrowing companies in Israel.
5. Amendment to Section 92A of the Income Tax Ordinance: An amendment to Section 92A allows investments in R&D companies listed on the stock exchange to be recognized as a capital loss in the year of investment, up to a maximum of NIS 5 million. This change provides investors with greater flexibility and potential tax benefits for their investments.

The Tax Authority and the Innovation Authority are required to jointly submit a report to the government regarding the utilization of tax benefits, the total benefits granted, and the impact of the law. This report should be presented up to six months before the temporary order expires. The purpose of this report is to assess whether it is advisable to continue offering these benefits and to keep the law in effect.

In summary, the law offers tax benefits to investors in Israeli high-tech companies, as well as incentives for companies involved in the acquisition or merger of other Israeli-registered companies with their primary operations in Israel. Additionally, the law provides tax exemptions to foreign entities that provide financing to Israeli high-tech firms.

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