The present caretaker government has just published a bill which, if enacted, would further expand Israel’s range of tax breaks for Israeli hi-tech companies (Encouragement of High Tech Industry Bill (ad hoc measures) 2022, bill number 1577 of August 18, 2022.
We summarize the proposals below.
Tax credits for angel investors
Old tax breaks for angel investors in Israeli companies have expired. New tax credits are proposed for “investors” in “R&D companies.” Qualifying investors would be individuals, closely held companies held by five or fewer shareholders and their relatives or newly formed partnerships that request approval from the ITA director within 90 days of registration in Israel.
The maximum investment would be NIS 3.5 million The tax benefit period and minimum investment period would be three years. The tax credit would be at the angel’s applicable tax rate.
Little use to foreign investors with no other Israeli taxable income. If and when the shares are sold, their cost for capital gains tax purposes would be reduced by the qualifying investment amount.
Qualifying R&D companies would need to meet various conditions including:
Not listed on a stock exchange.
Total technological revenues below NIS 4.5m. up to the end of the preceding tax year.
Total revenues up to NIS 12m. in the same period.
Average R&D expenditure of at least 7% of revenues per year.
R&D to account for 70% of total expenditure since incorporation.
IP (intellectual property) under development is owned or exclusive perpetual operational rights are owned by the company since incorporation, or before if transferred in by an individual or research institution.
Reinvestment rollover relief
Currently, Israel only allows capital gains tax deferral (rollover) for reinvested proceeds from a depreciable asset. It is now proposed to allow deferral to the extent that an individual reinvests sale proceeds from shares allotted by a preferred company with a technological enterprise in a qualifying R&D company.
The maximum gain deferred would be NIS 5m. The reinvestment would need to occur between four months before to 12 months after signing the sale agreement and last at least six months. If and when the allotted shares are sold, their cost for capital gains tax purposes would be reduced by the qualifying investment amount.
Various other conditions would also apply. There would be no double tax breaks – taxpayers may choose between the tax credit or the reinvestment deferral. Only Israeli resident investors would be interested as foreign investors are generally exempt from Israeli capital gains tax (they might be taxable in their home country).
Writing off takeover investment
Israel has experienced issues with some tech companies being acquired, their IP stripped out and their employees let go. So now a tax inducement is proposed for acquirers who stay put in Israel.
A qualifying acquirer company would be one with average revenues in the three previous years over NIS 75m. per year that gains control of a preferred company with a technological enterprise. The acquisition amount should be at least USD 20m.
A qualifying Israeli (acquired) company would be an Israeli resident company preferred company with IP and a technological enterprise in a qualifying R&D company.
A write-off deduction may be available over five years after the acquisition year if the acquirer acquires at least 80% control, paid at least 10%-25% of the unconditional consideration and didn’t shift IP.
The acquirer would have 12 months to consolidate the acquired technological enterprise with its own.
The number of Israeli employees and payroll costs may not decrease by 20%.
Pre-approval should be requested from the Israeli Innovation Authority.
A qualifying foreign company in addition to the above, must increase R&D of at least NIS 20 million by 10%.
If shares in the qualifying company are sold, the write-off would be offset against the share cost for capital gains tax purposes. Acquisition costs, royalties and usage payments would not qualify for the write-off.
Interest withholding tax exemption
Foreign financial institutions may qualify for zero Israeli withholding tax (instead of 25%) on interest on loans of at least USD 10m. to finance activities of companies with a technological enterprise, annual revenues over NIS 30m. and at least 5% Israeli resident individual shareholders. The number of Israeli employees and payroll costs may not decrease by 20%.
These proposed tax breaks come with numerous conditions and exceptions.
It remains to be seen what will be enacted and when. First up is another general election on November 1, and the ensuing coalition construction process. Watch this space.
As always, consult experienced tax advisers in each country at an early stage in specific cases. [email protected] The writer is a certified public accountant and tax specialist at Harris Horoviz Consulting & Tax Ltd.