2023-10-18 23:57 For CFOs

Angel Law

A new law (or an updated old one) in Israel, known as the "Angel Law" 📜, was introduced in July 2023. It provides tax benefits 💰 to individuals and companies that invest in research and development (R&D) businesses 🔬💼.

The "Angel Law" 👼 in Israel encourages investors to invest in Knowledge-Intensive Companies (startups) 💡🚀 by offering them tax credits 💰🧾. The tax benefits are provided on investments that are held for at least 3 years 📅. This can help mitigate the risk of sunk investments 💸⬇️, as even if the startup fails, the investor has already received a tax credit. However, if the conditions aren't met, tax benefits can be reduced or canceled 🚮 and non-compliance can lead to fines 💸.

Section 3 of the Encouragement Law in Israel lets you avoid tax if you reinvest profits from selling tech company stocks back into such companies within 12 months. For example, if you made $100k selling tech stocks, and within a year, you reinvested that into another tech company, you won't be taxed on that $100k. This can be a strategy for managing your investment portfolio - by reinvesting, you're effectively tax-shielding your profits while still growing your portfolio.📈💰🔄🏢

Section 4 states that an investor who qualifies for benefits for the same investment in a preferred company must choose only one benefit. Once the investor announces their choice, it cannot be changed. 🤔💼📊🗳️

Section 5 permits investment in shares of a profitable company as a deductible expense. A tech company purchasing controlling shares in a profitable company can deduct the "net purchase amount" from its annual tax over a 5-year period ("reduction period"), provided the company meets all the conditions to be a qualifying Israeli or foreign company. The net purchase amount is the actual amount paid for the control of the profitable company within 4 years from the agreement signing, after certain deductions.

For example, suppose your tech company purchased controlling shares in a profitable AI startup. You can deduct the net purchase amount from your taxes for the next five years, offering a significant tax benefit. But, you should consider all your deductions carefully as this affects the original price of the sold shares in future calculations. 🤖💼📈💰

For investors, it's important to analyze how such tax deductions affect the portfolio. They might make startups more attractive as potential buyout targets, providing another exit strategy for startup investments. 🔄💼📘💡

Section 6, which discusses tax exemptions for interest paid to foreign financial entities, requires an additional separate brief.

The Encouragement Law changed a tax rule for Preferred Technology Companies 📘that makes it easier for them to raise money by selling shares to the public. The change allows these companies to give tax breaks to their investors, which could make investing in them more attractive.

Before the change, only companies worth 200 million NIS or more could give these tax breaks. But now, companies worth 100 million NIS or more can also give these tax breaks. This helps smaller tech companies to raise money through a public offering of their shares (IPO). It also means that investors have more choices when deciding where to put their money.