OpinionThe Angels Law 2.0 – A real incentive or mission impossible?
Opinion
The Angels Law 2.0 – A real incentive or mission impossible?
The new law is intended to increase investment incentives in Israeli startups and established companies by corporations, but sets conditions that are not always easy to meet
On July 25th, 2023, the Israeli Parliament passed the Law to Encourage the Hi-tech Industry (Temporary Order) (also referred to as the: "Angels Law"). The purpose of the Angels Law is to provide certain tax benefits and relief to both individual and corporate investors, in order to promote the growth of Israeli high- tech companies in general, and startup companies in particular, which hold their center of operations and IP in Israel.
A close review of the Angels Law which currently is only temporary in nature, raises several conclusions. One of them, unfortunately, is that the prospects of the law to achieve its declared goal seems to be low, especially because of the high bar set by the conditions of the law.
To understand it, we should go back to the beginning of the last decade. The original "Angels Law" was legislated in 2010, in order to encourage individuals to invest in Israeli startup companies. Now, under the new Angels Law, the State of Israel is also looking to encourage certain corporations to purchase the means of control in Israeli, or foreign startups, and to encourage foreign financial institutions to provide loans to certain Israeli companies, if certain conditions are met. However, those conditions are incredibly challenging to meet.
Tax benefits for purchasing startup companies
Under the new Angels Law, an investment whose purpose is to acquire at least 80% of the means of control in a "Preferred Company" with a "Technological Enterprise", or in a "R&D Company", by another Israeli "Preferred Company" with a "Technological Enterprise", may be deducted as a business expense during a 5-year period, against the acquiring company's "Preferred Technological Income".
The terms "Preferred Company", "Technological Enterprise" and "Preferred Technological Income" generally relate to Israeli companies that own IP, and derive income from such IP, or derive income from services that are software based, which its R&D expenses constitute an average per year of at least 7% of the overall income of the company, or that it generated income of NIS 75 million per year on average in the last three years, in addition to other certain conditions.
For startup companies, particularly in early stages, these conditions make the benefits, which will be detailed below, non-relevant.
On the other hand, the term "R&D Company" is defined as a company that was incorporated in Israel and operates in Israel as a privately held company, in which, since its establishment and up to the tax year prior to the applicable investment, its overall technological income did not exceed NIS 4,500,000, its overall income did not exceed NIS 12,000,000, did not receive investments and/or loans exceeding NIS 12,000,000 from its incorporation, and which at least 70% of its overall expenses were expended for the development of IP which is based on R&D taken out by the company.
These ranges in income makes the Angles Law irrelevant for many companies.
The tax benefits may be granted subject to additional conditions, such as The acquiring company must be classified as a Preferred Company with a Technological Enterprise; The acquired company must be classified as a Preferred Company with a Technological Enterprise, or as a R&D Company; Etc.
Tax exemption on interest payments to foreign lenders
The Angels Law also provides a special withholding tax exemption on interest payments made to a foreign financial institution that has provided a loan to an Israeli company. On this issue, things take a turn for the worst, as the following primary conditions should be met as a condition to receive the tax benefit: The Israeli entity receiving the loan is a company classified as a "Preferred Company" operating a "Technological Enterprise"; The loan amount must be at a minimum of $10 million; The lender and borrower are not closely related, nor does one entity hold 10% or more of its counterpart's means of control; The borrower's Technological Income in the tax year preceding the provision of the loan is not less than NIS 30 million; And the loan amount was transferred in full to the borrower by December 31st, 2026.
Pursuant to the above, it is quite clear that the Angels Law provides complex conditions that would require thorough review by a tax expert to make sure that all conditions are met in order to be eligible for certain tax benefits or relief.
The information provided in this review does not, and is not intended to, constitute legal advice. Instead, all information is for general information purposes only.
The writer is a leading partner in the field of tax law at Arnon, Tadmor-Levy law firm
