New law Memorandum: New tax incentives for public high-tech companies and investors

In order to promote the technology industry and to restore the Israeli stock exchange to its position as an attractive arena for capital raising to companies, an ad hoc committee was formed to analyze feasible tax incentives.

A memorandum summarizes the committee’s key recommendations:

1. Establish publicly traded high-tech funds, applying the model of closed mutual funds, which may invest up to 30% of the sum raised from the public in securities of unlisted high-tech companies, and up to 50% if they receive government support. These funds will be tax-exempt, provided they received the tax administrator’s approval.
2. The tax exemption to provident funds on dividend income, interest, and linkage differentials from the holding of a high-tech fund will apply, even if the shareholding is at a ratio of up to 75% (and not 50% as in effect today).
3. A temporary order should be legislated for a period of three years. According to this order, the cost of the investment in shares acquired within the scope of a public issuance of an R&D company (as recognized by the Chief Scientist and floated at a sum of between NIS 0.2 and 1 billion) shall be recognized on the investment date as an off-settable capital loss.
   This will be instead of recognizing the sale of the shares as a cost. This will apply, up to the sum of NIS 5 million, for the period of January 1, 2016, through December 31, 2018. If the investor does not utilize his entire loss, this loss will be recognized as a cost when the shares are sold.
4. Individuals who are controlling shareholders of R&D companies will be able to opt for a tax liability on the rate of the rise of options held by them before the company is listed on the TASE, from the listing date on the TASE and until the options are exercised, via a capital gains track within the scope of section 102 of the Income Tax Ordinance, and not pursuant to section 3(i) – marginal tax rate.

These incentives, if instituted, could provide a serious impetus both to the drowsy Israeli capital market and to investors. It may be necessary to revise the proposed wording in order to mitigate the indirect damages and minimize claims of discrimination. Aside from this, however, this brave step can only contribute to the Israeli economy and benefit the investor public.

We emphasize that when the government promotes tax benefits of this kind, it is important to arrange the green tracks to receive these benefits in advance. This will ensure there is not a situation, like with the Angels Law, where, due to bureaucratic problems and uncertainties, the attempt failed. We hope that by the time the law is legislated during its final reading, the authorities will wisely provide the legislators with access to and understanding of the bureaucratic processes.

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Source: barlaw.co.il