This column recently discussed new tax breaks for angel individuals who invest in hi-tech start-ups. Such individuals can write off their investment against any other income over three tax years if certain conditions are met.
What can corporate investors enjoy?
The Economic Policy Law for 2011-2012 contains a new tax break for Israeli “acquiring companies” that acquire other “qualifying companies.”
Both will be hi-tech companies. This supplements detailed rules allowing tax-deferred corporate mergers, reorganizations and divisions in certain circumstances (Income Tax Ordinance Sections 103-105).
Under the new tax break, an “acquiring company” can amortize the net purchase price paid for the means of control in a “qualifying company” in equal annual installments against any other income in the “amortization period.”
The amortization period is five tax years commencing in the tax year after the acquisition.
The net purchase price is the amount paid for means of control, but not by way of share allocation, less the shareholders’ funds (share capital, profits, reserves, share premium, other premiums).
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The result typically represents the value of intellectual property, which can be amortized as mentioned above.
Various general conditions must be met: the acquisition date must be in 2011-2015; at least 80 percent of all means of control are acquired; the acquiring company and qualifying company are unrelated on the day before the acquisition; the Israel Tax Authority’s director must confirm that tax avoidance or improper tax reduction must not be one of the main aims for the acquisition.What is an ‘acquiring company’?
An acquiring company is a company incorporated in Israel, whose business is controlled and managed in Israel, that meets various detailed conditions. These are briefly summarized as follows:
(1) Privileged or preferred company, as defined in the Law for the Encouragement of Capital Investments, 1959, in the acquisition year (and throughout the amortization period);
(2) R&D expenditure at least 7% of revenues in the latest year or latest two tax years (and throughout the amortization period);
(3) 20% of personnel hold degrees in the fields of engineering, computers, natural or exact sciences in the latest year or latest two tax years (and throughout the amortization period);
(4) Didn’t hold more than 25% of any means of control of the qualifying company in the 12 months preceding the acquisition year.What is a ‘qualifying company’?
A qualifying company is a company incorporated in Israel, whose business
is controlled and managed in Israel, that meets various detailed
conditions. These are briefly summarized as follows:
(1) No securities publicly traded in the tax year;
(2) Privileged or preferred company, as defined in the Law for the
Encouragement of Capital Investments, 1959, in the acquisition year;
(3) R&D expenditure at least 25% of revenues in the latest year or
latest two tax years (at least 7% throughout the amortization period);
(4) at least 40% of personnel hold degrees in the fields of engineering,
computers, natural or exact sciences in the latest year or latest two
tax years (at least 20% throughout the amortization period);
(5) All R&D expenditure in the first three years of the amortization
period are incurred to promote or develop the enterprise owned by the
qualifying company or the acquiring company, and at least 75% is
incurred in Israel (this implies that one of those companies own the
(6) No real-estate rights in Israel or abroad in the acquisition year (the intention is presumably ownership rights);
(7) Holds no means of control in any other entity in the acquisition
year unless the activity is marginal, involved and integral to its
Throughout the amortization period, R&D expenditure must be incurred
by the qualifying company to promote or develop an enterprise owned by
the qualifying company or the acquiring company, and 75% of the R&D
expenditure must be incurred in Israel. If the applicable conditions in
this amortization period are not all met in one of the years, the
amortization is forfeited that year and cannot be carried forward.
Note that the investment amount deducted against income under these
rules reduces the cost of the shares upon a future sale for capitalgains
It may be useful for an Israeli hi-tech company to write off the cost of
acquiring 80% or more control of another Israeli hi-tech company even
if numerous conditions must be met. But typically, acquiring companies
prefer to acquire defined assets, not shares, of other companies, to
avoid acquiring any hidden liabilities in those companies.
On the other hand, sellers of a company typically prefer to sell their
shares to avoid two layers of tax on an asset sale (tax on asset sale
and subsequent dividend or liquidation).
So, it remains to be seen whether this tax break will prove popular. The
new tax break is discriminatory to foreign companies in Israel. But few
foreign companies do business in Israel, and Israel’s tax treaties
usually have an antidiscrimination clause.As always, consult experienced tax advisors in each country at an early stage in specific firstname.lastname@example.org Leon Harris is a certified public accountant and tax specialist at Harris Consulting & Tax Ltd.
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