In the framework of the economic policy for the years 2011-2012 (hereinafter: the “legislative measures“), some fundamental amendments have been made in Chapter 7 (the Temporary Order), that provide significant tax benefits. These measures are designed to encourage young Israeli high-tech companies who exercise their activity in the field of research and development. Inter alia, the amendments are targeted to:

• Encouraging investment in shares of the start-up companies at the stage of their establishment. Article 20 of the Temporary Order allows, under certain conditions, the private investors who bought, within the period from 01.01.2011 to 31.12.2015, shares of Israeli research and development companies, during 3 years to exclude the assets spent on the investments (up to 5 million shekels in total) from taxable income (as contrasted with any other revenues including their own income, income from business activities, and so on). Due to this tax cut, the state actually losses 45% of tax revenues. This is an unprecedented tax benefit.
• Acquisition of shares of high-tech companies. Clause 21 of the Temporary order states that the “beneficiary” company or “priority projects”, as they are defined in the Law “On investment stimulation”, who purchase shares of young high-tech companies (engaged in research and development activities in Israel) will have the opportunity (under certain conditions) to acquire shares at a discounted price and thus reduce the cost of capital investments. This is intended to compensate lower profitability as compared to other sources.

As a result of the said tax remissions, the capital investments to be increased by 18-24% and the Israeli companies retain the acquired now-how.
One of the conditions for the company to obtain status of “beneficiary” or “priority project” is its not-involvement in trading on the exchange market and acquirement of at least 80% of the shares.

• Increasing the number of scientists in Israel. Clause 22 of the Temporary order provides that the scientists who immigrate to Israel during the period from 01.01.2011 to 31.12.2015 (including the Israeli citizens coming back after having been lived 6 years outside Israel as permanent residents of foreign states), who signed a contract with an innovative company, will get tax exemption on the royalties for the period of 5 years.

It should be noted that as for now, the Temporary order might be applied only within the period from 2011 to the end of 2015. Nevertheless, it is a positive and important step aimed at attracting investments in the start-up activity of Israeli high-tech companies.
On the additional tax benefits for high-tech companies – see our comments to the law “On the stimulation of investments in 2011”.

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