Tax advantages and tax issues for investment in HiTech companies

Pick & Weiss Legal Offices
March 23, 2013
January 9, 2019

Lior Pick, lawyer, accountant, TEP

Israel is a start up nation, an economic miracle, called by the experts the “Middle East Silicon Valley “.

There are a lot of reasons for this success. One of those reasons is probably the fact that Israeli government created interesting tax incentives for the Hi Tech sector in Israel to support investment.

What are the tax incentives for Hi Tech in Israel?

Tax incentives for individuals to invest in Hi Tech

First of all, let’s focus on the tax incentives for individuals’ investment in Hi Tech companies.

  1. Article 97 B2 of the Israeli Income Tax Ordinance

Article 97 B2 of the Israeli Income Tax Ordinance determinates a capital gain tax exemption for foreign residents regarding the sale of securities registered and traded on the TASE.

A foreign resident is exempted from capital gain tax when he sells his securities on the TASE.

There are some conditions. One of them is that the capital gain is not related to a permanent establishment in Israel.

     2. Article 97 B3 of the Israeli Income Tax Ordinance

Secondly, article 97 B3 of the Israeli Income Tax Ordinance determinates a capital gain tax exemption for foreign residents regarding the sale of rights in an Israeli company or in a foreign company where the majority of its assets is in Israel (except real estate).

There are some conditions to benefit from this advantage: the rights have to be purchased after the 1.1.2009, the capital gain tax is not related to a permanent establishment in Israel, the purchase was not from a relative and not part of an merger & acquisition process, the rights were not traded on the Tel Aviv Stock Exchange (TASE) at the day of the sale…

The exemption applies also to new immigrants and return citizens for 10 years if they were not Israeli resident when they purchased the rights.

     3. Article 20 of the Law of economic policy for 2011 and 2012

Article 20 of the Law of economic policy for 2011 and 2012 determinates that investments in start up companies can be deducted from the business profit.

Indeed, the Israeli government wants to encourage individuals that have business profits to invest in Israeli start ups.

If an individual invests in a start up, he can deduct the investment expense from his business profit. Consequently, his profit will be reduced and he will pay less taxes.

For example, if a doctor or a lawyer (an independent) made a profit of 5 million NIS for this year, he can pay his tax on this profit (approximately 50% taxes on the profit – 2.5 million NIS taxes). On the other hand, he can invest 5 million NIS in Hi-Tech companies and this investment can be deducted from his profit. Consequently, he won’t pay any tax on his profit this year.

It is equal to a loan without recourse of tax administration; the tax administration is sharing the risk with the investor.

The conditions to benefit from this advantage are the followings:

     1. the investor has to invest in a “target company” :

  • A company registered in Israel
  • The control and management of the company is in Israel during all the period of the advantage
  • The shares of the target company are not traded in the TASE
  • At least 75% of the amount of the investment is used by the company for R&D.
  • At least 75% of the R&D expenses are in Israel.
  • And other conditions that tend to verify that the company is a R&D company…

     2. Between the 1.1.2011 and the 31.12.2015

     3. By allocation of shares in the same tax year

     4. Up to 5 million shekels

     5. The individual has to hold the shares during 3 tax years

     6. etc

Tax incentives for Hi Tech companies

Interesting tax incentives have been created by the Israeli government also to support Hi Tech companies.

     1. The deduction of the expense of goodwill

Since 2003, 10% from the price of the goodwill can be deducted each year for 10 years.

The purchase of the goodwill has to be after the 1.1.2003. It has to be underlined that it is impossible to buy the goodwill from a relative or from a foreign resident unless it is proven to the tax administration that the purchase of the goodwill was essential for the business activity.

     2. Deduction for the purchase of shares in other R&D companies

If a company purchases shares in another R&D company, it is possible to deduct the amount paid for the purchase from the total income of the company during 5 years.

The conditions are the followings:

  • The day of the purchase is between 1.1.2011 and 31.12.2015
  • The purchase is at least 80 % in each mean of control in the purchased company
  • In the day before the purchase day, the buyer and the purchased company aren’t connected (no more than 25% of control)
  • The control and management of the buyer and of the purchased is based in Israel
  • Other conditions to check that it is a real R&D company
  • Etc.

     3. Preferred enterprises

The company tax in Israel is 25% today. It is important to precise that there is also a lower company tax rate for special enterprises called “preferred enterprises”.

It is a benefit from the Israeli government to encourage Israeli industry and to create more jobs.

A preferred enterprise is a company that has an industrial activity and at least 25% of sales which are exported. A software company can be considered as having an industrial activity.

Additionally, some preferred enterprises can benefit from a lower tax rate if they are located in peripheries called “Zone A” (Dimona nect to Beer Sheva, Maale Adumim next to Jerusalem or Carmiel in Galil).

A new law determinates also that Hi Tech companies located in Jerusalem can benefit from the tax rate for zone A.

The company tax rate is be very reduced: for 2013-2014, 7% in zone A and 12,5% in other zones. From 2015, the company tax rate will be 6% in zone A and 12% in other zones.

The preferred enterprise will be also entitled to accelerated depreciation rates for the assets used (buildings, machines…)

Additionally, the preferred enterprise benefits from a lower dividend tax rate: the dividend tax will be 15% instead 25% or 30%, however if the shareholder that receives the dividends is an Israeli resident or a foreign resident.

The aforementioned contains nothing to serve as an opinion and/or an alternative to individual legal taxation advice. We will be happy to be at your disposal for any queries and or explanations regarding this or any general matter. Our office specializes in taxation advice (income tax, betterment tax, VAT) and also accompanies real estate, company and international transactions.

Best regards,

Lior Pick & Co Law Firm


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