With spending on research and development (R&D) and
venture capital investment as a percentage of GDP among the
highest in the world, Israel has entered 2019 as a leading
Israel's growth in the tech sector has historically been
underpinned by its progressive tax framework. Since the 1960s,
corporate tax rates for new initiatives have been reduced
repeatedly, while in 2003, Israel significantly improved
beneficial tax arrangements for employee equity 'awards'.
Israel, in addition, enacted tax perks and full exemptions for
domestic and foreign equity investors.
The 2017 re-modernisation of Israel's 1959 'encouragement'
legislation (pairing Israel's tax benefits to the OECD's
instructions on fair tax competition) has further enhanced tax
reliefs for income generated in high-tech and innovation
industries. In 2019, corporate tax rates on industrial income
may range from as low as 6% to 16% depending (but not
exclusively) on the volume of activity and geographic location
of the taxpayer.
Tax certainty for foreign funds and investors
Starting 2009, foreign investors have been able to claim
full tax exemption on gains made in investments in Israeli
companies. In light of the fact that foreign investor funds
(both venture capital and private equity) are often managed by
an Israeli general partner, permanent establishment issues
would endanger the tax exemption for foreign investors in the
To prevent uncertainty, the Israeli tax authorities
developed and published the conditions under which exemption
from tax for foreign investors in these funds would be
safeguarded to include the size of total investments and
minimum number of investors.
These venture fund rulings were put into a new jacket in
April 2018 when Israel's tax authorities formally published
revised rules (Circulars 9/2018 and 10/2018) for foreign
investor funds to secure tax exemption and limited withholding
tax. Funds are eligible even when a general partner is
functional in Israel, as long as more than 10 limited (foreign)
partners are present, 30% of investors are foreign, and
investment commitments amount to $10 million. Non-Israeli
investments held by the fund should not trigger taxation in
Israel. The authorities have indicated that a slight deviation
may be considered under certain circumstances.
Public and institutional investment in (young) R&D
Israel's tax authorities announced on December 21 2018 how
they would implement a 2016 accepted measure to encourage
investment in young R&D companies by public and financial
institutions. The ultimate goal of this arrangement is the
provision of 'oxygen' for riskier, younger companies by
traditionally conservative investors: institutional investors
and the public.
Under the new rules, an investor in a qualifying R&D
company may recognise the amount of their equity investment
(paid in cash for issuance of shares) as a tax relevant capital
loss up to an amount of NIS 5 million ($1.4 million). This
'loss' may be offset over three tax years against taxable
income (similar to Israel's Angels Law).
When shares in an R&D company are later sold, taxable
results are determined after adding back the loss. For an
R&D investment to qualify, the market value of the company
should be between NIS 200 million ($55 million) and NIS 1
billion ($272 million). Each tax year, the company must have
received confirmation from Israel's Innovation Authority that
at least 70% of the company's expenses are R&D related.
Founders of an R&D company may claim the lower gains tax
rate on the sale of shares they held prior to the company's
listing, even though they are functioning in an employment
relationship with the company.
An interesting detail is that the encouragement of
participation and management by institutional investors in
publicly traded technology funds (public tech fund) now allow
tax exempt provident funds to control up to 75% of the fund,
while their tax exemption on investments in 'regular' funds
prohibits a control in the fund in excess of 50%.
The significant number of existing tax benefits available
for R&D and IP-owning companies including low corporate tax
rates, reduced withholding tax on dividends, together with a
package of benefits for investors make for an encouraging
beginning to an innovative 2019.