Students visit a Tel Aviv start up 390.
(photo credit: Courtesy Gil Lupo)
Israel offers substantial tax breaks to angel investors in Israeli start-up tech
Foreign and Israeli resident individuals may deduct from total
taxable income a “qualifying investment” of up to NIS 5 million in shares of
“target companies” over a “benefit period” of three tax years commencing with
the tax year in which the investment is made. The investment must be made in the
years 2011-2015. The individual must hold the shares allocated to him throughout
the three-year benefit period. In addition, tax avoidance or improper tax
reduction must not be one of the main aims for the investment.
“qualifying investment” is an investment by an individual in a tax year in
consideration for shares allocated to him in that year. This rules out buying
shares from another shareholder. A “target company” is a company incorporated in
Israel whose business is controlled and managed in Israel, which meets a number
of conditions with regard to the qualifying investment:
• First, no securities
may be listed on any stock exchange in the benefit period.
• Second, at
least 75 percent of the amount invested by the individual, in consideration for
the shares allocated, is used for research and development (R&D) expenditure
approved by the Chief Scientist’s Office by the end of the benefit
• Third, until the preceding condition is met, in each year of
the benefit period and in the tax year that condition is met, such R&D must
represent at least 70% of the expenses of the company (the term “expenses” is
• Fourth at least 75% of the R&D expenditure of the
company in the benefit period is incurred in Israel.
• Fifth, in the year
in which the qualifying investment is paid and the following year, revenues of
the company should not exceed 50% of R&D expenditure.
throughout the benefit period, R&D expenditure is spent on promoting or
development of an enterprise owned by the company.
It is interesting to
note that foreign-resident investors apparently can enjoy a double whammy. It
seems they can claim the investment deduction against other Israeli-source income
(e.g., dividends) AND an exemption from Israeli capital-gains tax when they sell
their shares (assuming they are not doing business in Israel). Nevertheless, the
tax position in the investor’s country of residence must also be
In addition, if any angel, foreign or Israeli, invests under
these rules at the end of the tax year (December 31), it seems they can still
deduct one-third of their investment in that year against other Israeli-source
To sum up, an angel investor and the target company must each
jump through a few hoops.
Wishing all our readers a happy
Pessah.As always, consult experienced tax advisers 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.