The further example of a transparent tax entity in Israel – the Partnership

This article will examine the area of startup companies and the enhanced benefits that investors in these companies can enjoy.

  • When we hear about a successful exit, i.e. the sale of companies that began their existence as a start-up, we admire them and also sometimes speculate about what would have happened if we had been able to invest in such a company?
  • The Israel Innovation Authority has provided such an opportunity for the individual. If an investor has cash available, and is wondering how best to invest it, there is a new opportunity to enable such a person to take part in a start-up company and enjoy the fruits of the sale and a significant immediate tax benefit.  This is the “Investments in Start-up Companies Act”, more commonly known as the “Angels Act”.
  • In April 2017, in order to promote and support Israel’s relative advantage in high-tech industries and R&D, which constitute one of the main growth engines of the Israeli economy, the State decided to provide incentives to individual investors in these companies.

This is in recognition of the difficulty experienced by these companies in the initial stage of R&D in attracting investors and the importance of R&D activity in Israeli companies for the future of Israeli high-tech industry.

Objective of the Act:

  • To create an incentive to invest in start-up companies and to increase private sector investment in these companies.
  • To increase the number of startup companies that reach the stage of being able to manufacture and sell a finished product.
  • To grant an immediate tax benefit which will give a measure of certainty to the individual investor regarding this benefit.

What is the tax benefit?

  • For a single investor who invests in emerging companies as an investment channel, the entire amount of his investment will be recognized as an expense, that can be offset against any source of income that he may enjoy, for amounts ranging from NIS 100 to NIS 5 million.
  • In this way the start-up companies will enjoy the support of an extensive investing public.

In order for the investment to be recognized for tax benefits, the company in which the investment is made must be a company that has received approval from the IAA for innovation and is recognized as a start-up company.

How does a company apply to be considered a start-up company in which investors can enjoy immediate tax benefits?

The company must apply for recognition as a start-up company.

The approval may also be granted for a period earlier than the date of submission of the application.

The conditions that must be met at the time of submission of the application and during the three years of the benefit:

Regarding the company:

  1. The company must have been incorporated in Israel and be controlled and managed in Israel. These conditions must exist for the entire period of the benefit. (Three tax years from the date of the investment).
  2. At least 75% of the Company’s R&D expenses recorded during the benefit period must be expended in Israel.
  3. The company’s revenue in each of the first two tax years of the benefit period, may not exceed 50% of the R&D expenses incurred by it (Income and not profit).
  4. During the benefit period, the company’s R&D expenses must be applied in favor of development and promotion of its own product and cannot be applied for the benefit of another company (This provision also extends to expenditure on behalf of a parent company).

Additional Terms:

  • The scope of the investment in the company and the loans granted to it, from the date of its incorporation until the date of the investment, including the amount of the qualifying investment, may not exceed NIS 12 million.
  • The company’s turnover may not exceed NIS 4.5 million, from the date of establishment until the date of submission of the application and may not exceed NIS 2 million in any tax year.

Conditions applying to the involvement of the individual / investor:

  1. The amount of the investment – a cumulative amount of up to NIS 5 million will be allowed for each individual which may be deducted from his income for tax purposes. (Or a partnership between individuals – when the investment is broken down for each individual in the partnership separately).
  2. The date of the investment will be from November 1, 2016.
  3. The individual will hold shares in the target company / start up, which will be allocated to him in return for his qualifying investment, throughout the period of the benefit. (The benefit period is defined as a period of three tax years, commencing in the tax year in which the amounts constituting the qualifying investment were made)

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