Recently the Finance Committee approved a Government legislative proposal which is intended to promote investments in hi-tech companies. The tax benefits which were previously given for investments in seed stage companies were found to be insufficiently effective and it was found they should be improved. It is against this background that this legislative proposal arose. The amendment proposed concerned Section 20 to the of the Economic Policy Law for the years 2012-2011, which – by means of a temporary order – allowed investors in hi-tech companies to deduct their investment from their income on an ongoing basis. This proposal contains a number of concessions.
An important change proposed is as to the definition of a start-up company. A company which falls within the definition will be entitled to concessions currently afforded to target companies and similar terms will apply. A start-up company is a company whose accountant has approved that, as at the date of the investment 48 months have not yet elapsed since the date of its incorporation (or 60 months when the company is operating in development area A), or that 12 months have not yet elapsed from the expiry of the period applying to assistance received (if received) from the Office of the Chief Scientist (OCS) and whose inclusive sale and expenses and the investments therein are not substantial. It is a requirement that the OCS will confirm that at least 70% of the company's expenses were incurred in relation to the development of the product developed by the company and that the product and all rights relating thereto are the in the ownership of the company. This will be the case even if the company purchased the said rights from a an R&D unit or R&D institute or the like. In addition, it is required in relation to a start-up company that more than half of its expenses will be made in Israel, in accordance with the requirements of the OCS.
Further concessions deal with the time of investment, which is to be defined in a clear manner as the later of the date on which the investor paid the amount of the investment or the date of the issue of the shares. Likewise, not only will investments by individuals be allowed but also those of partnerships whose purpose is to make investments of that kind as an investment credit. Also the period of the tax concession will be three tax years commencing in the tax year in which the investment is made.
Having said that, the investment credit will be calculated from now on only where the investment is in cash in the target or start-up company. Furthermore, in any event the investor will not be allowed an expense in an amount exceeding NIS 5 million in any tax year, in a target or start-up company.
The proposed tax concession track is to operate as a temporary order through to the end of 2019. It is important to note that the National Authority for Technological Innovation is entitled to require from a target or start-up company to provide it all information and documents needed by it in order that it fulfil its role as defined in this legislative proposal.
Reference: Not Final Version of Legislative Proposal to the Economic Policy Law for the Years 2012 and 2011 (Legislative Amendments) (Amendment No. 5), 5776-2016, after approval by the Finance Committee of the Knesset