The Angels Law provides private investors, or Angels, with opportunities to invest and receive significant tax benefits on those investments. Israel provides tax benefits to private investors in young companies, specifically, those who have R&D. Israel strives to have a young, dynamic R&D market, so they pass these laws to encourage foreign direct investment into R&D firms. Angels law primarily focuses on high-tech companies with significant R&D investments.
Israel passed an initial version of the Angels Law back in 2011, but it ended up unsuccessful as it had too many conditions to be met. Investors took advantage of the law infrequently because of uncertainty as to whether the investment would qualify for the tax benefit. The Israeli government amended the law in 2016, making it easier to qualify for Angels law. The amendment set conditions that, if satisfied, provide the investor with an assurance that their investment would be entitled to the Tax Benefit at the time of investment. The amendment was passed in 2016 and was set to expire on 31 December 2019 but no new amendment has been passed since.
The law allows for purchases of up to 5 million NIS to be deducted from taxable income. The purchases must be in original-issue shares of a qualified Israeli R&D company by December 31, 2019. This was the amendment to the law passed in 2011, and it had fewer conditions to be met than the former.
The benefits
Information about the law (2016 amendment):
- The law allows for purchases of up to $5 million NIS to be deducted from taxable income
- The purchases must be in original-issue shares of a qualified Israeli R&D company by December 31, 2019
- Individuals can defer tax on up to NIS 5 million of income invested in a company
- Allows tax to be paid up to 3 years later at the capital gain rate of 25% instead of the marginal rate of 50%
- Cost basis of shares – the amount of investment deducted as an expense from the investor’s current income = capital gains when the shares are sold
- Requirement for the investor to hold shares in the Israeli R&D company for the duration of the “Benefit Period”: the year the investment was made and the following two years
- Criteria for eligibility found here: https://www.kronengold.com/israels-angels-law/
Target Company
If an investor chooses to invest in a company that satisfies the criteria of a “target company”, that investor is allowed to have their investment recognized as a deduction against their entire income for up to three years. This period is from the beginning of the tax year in which the capital is repaid. Certain criteria must be satisfied for a company to be classified as a “target”. They are listed below:
The terms necessary to be recognized as a target company:
- Must reside in Israel
- Not a public company (traded on the stock market)
- Approved as an R&D company by the Innovation Authority (criteria above)
- Minimum of 75% of the investor’s investment must be used for R&D
- Minimum of 75% of the company’s expenses must be R&D expenses
- Minimum of 75% of the company’s R&D expenses during the benefit period are in Israel
- During the benefit period, the company’s revenues did not exceed 50% of the R&D expenses.
Starting Company
After the 2016 amendment, tax benefits also can be granted to companies that are classified as a “starting company”.
The main criteria are listed below:
- Company must be registered in Israel
- Total sales must not exceed US $1 million per year
- Total funds raised must not exceed US $10 million
- Company must not have outstanding debts
- Company must not be in the process of liquidation
Full criteria detailed here: https://innovationisrael.org.il/program/2718
Finally, a benefit of investing in a start-up is that the company takes all the risk, not the investor in case of a breach of conditions. If the company does not meet the conditions to qualify for the tax benefits, the investor would not be punished for this.
