The “Angels Law” promotes investments in Israeli high-tech startups

The Law for the Encouragement of Knowledge-Intensive Industries was promulgated as a Temporary Order on July 31, 2023 and is a continuation of the previous Angels Law that expired at the end of the 2019 tax year. The goal of the new Angels Law is to help Israel maintain its standing as an attractive hub for investments in high-tech startups by granting various tax incentives to investors. This Temporary Order will be in effect until the end of 2026. ( Click here to read our latest update on the tax benefits available under the new Angels Law.)

In February 2025, the Israel Tax Authority published an income tax circular elaborating the new Angels Law’s principles and criteria for the tax benefits offered to investors that invest in Israeli startups falling under the definition of “R&D company.”

The ITA published this circular shortly after its other recent publications announcing reliefs to the high-tech sector, including: a draft bill easing the conditions for tax relief during corporate restructuring, and tax circulars presenting guidelines for investments in SAFEs and procedures for enhancing tax certainty for multinational high-tech companies.

Tax benefit alternatives given to investors in Israeli early-stage R&D startups:

• Tax credit: an investor in an “R&D company” (as defined in the Temporary Order) will receive a tax credit calculated according to its total investment multiplied by the Israeli capital gains tax rate that would have applied had the investor sold the shares of the R&D startup allotted to it during the same tax year in which it executed its investment. The total investment (in respect whereof the investor will receive a tax credit) will be deducted from the calculation of the purchase cost of the R&D startup’s shares for the purpose of calculating the capital gain to be generated in the future when the investor sells its shares in the R&D startup. In other words, the benefit represents a tax deferral, whereby the investor will pay the capital gains tax only when it sells its shares in the R&D startup.

• Tax deduction from a share swap: an investor who sells shares of a preferred enterprise that owns a technological enterprise (as these terms are defined in the Encouragement of Capital Investments Law) and uses all or a portion of the proceeds to invest in an Israeli R&D startup, will benefit from a tax deferral until the investor sells the shares allotted to it during the investment transaction. The tax deferral will be carried out by way of a deduction – its total investment in the R&D startup will be deducted from the capital gain generated from the sale of the investor’s shares in the preferred enterprise at the present time, but will be deducted from the cost of its investment in the R&D startup, such that the investor will pay tax only when it sells its shares of the R&D startup in the future.

Investors can choose either of the above two benefits – either a tax credit or a tax deduction during a share swap (double benefits are not allowed) and must report the requested benefit using a designated form. The benefit period in respect of each investment in an R&D startup is three tax years commencing as of the tax year in which each particular investment was executed.

Investors

In order to receive the tax credit benefit, an investor must be an individual, a closely held company, or a partnership. The  circular however clarifies that a partnership can execute a qualifying investment only if it is a partnership that engages solely in investments. The circular also specifies the criteria according to which a qualifying investment can be made through a trustee in trust, or by an employee of the company or by a foreign resident investor. However, the second benefit (tax deduction during a share swap) will be given solely to individuals.

Israeli early-stage R&D startup

Following are some of the criteria that will be examined for the purpose of qualifying for recognition as an early-stage R&D startup:

• no securities have been listed on the TASE since the startup’s incorporation;
• the startup is managed in Israel;
• the startup’s annual technological revenues in the tax year preceding the investment did not exceed ILS 4.5 million, and its total revenues do not exceed ILS 12 million;
• the startup’s average R&D expenses since its founding constituted at least 7% of its total income (the circular clarifies that the calculation will be performed according to the accounting rules and not according to the tax rules);
• the startup must fulfill one of the following criteria:
  •    the wages of at least 20% of the company’s employees are classified as R&D expenses, or the company employs at least 200 R&D employees;
  • a venture capital fund has invested a minimum of ILS 8 million in the company cumulatively (and not in each tax year) and the company has not changed its sphere of business (the circular clarifies that the examination of a change in sphere of business will be done broadly);
  • the company’s turnover revenue exceeded ILS 10 million, and the company’s income during the last three years grew on average by 25% annually;
  • the company employed more than 50 employees in the applicable tax year and during the three preceding years, and the number of the company’s employees during the previous three years increased on average by 25%;

• at least 70% of the startup’s expenditures since its incorporation was used to develop a beneficiary intangible asset based on research and development carried out in the company;
• the asset under development and the rights deriving therefrom have been owned by the startup since the date of its creation (or the asset was acquired from “another party” as defined in the law).

Investment in an Israeli early-stage R&D startup

An investor who invested in an Israeli early-stage R&D startup may apply for a tax credit in respect of its investment, provided that it fulfills several criteria, including:

• the investment must be injected in cash during the period of the Temporary Order (31.7.23-31.12.26) (the circular clarifies that the investment must be in consideration of shares and may be executed through options or SAFEs);
• an investment will only be deemed a qualifying investment if it is for a legitimate business purpose and not merely for the purpose of tax avoidance;
• the investor is not an interested party in the R&D startup i.e. the investor held less than 25% of the company’s shares prior to its investment.

Furthermore, in order to quality for the tax credit benefit, the investor must hold the shares of the R&D startup allotted to it for at least three years; and, if the investor is a partnership, the partners’ holding ratio of rights must not change. In order to qualify for the tax deduction during a share swap benefit, the investor must hold the shares of the R&D startup allotted to it for at least six months.

Investment cap

The maximum investment is ILS 4 million for the tax credit benefit and ILS 5.5 million for the tax deduction, during a share swap benefit. The ITA clarifies that any sum that the investor receives from the R&D startup during the benefit period will be deducted from the investment cap. The investment cap is determined according to a specific investor’s total investment in a specific company, whereby several investors can invest in one company and one investor can invest in several companies – with all investments being deemed qualifying investments and the investment cap will be examined in relation to each company separately.

The investment date

The investment date will be deemed to be the later of the payment date to the R&D startup or the share allotment date to that investor; in the instance of investments in options or SAFEs, the investment date will be deemed to be the agreement signing date.

Window of opportunity to receive tax benefits

As stated, the Temporary Order is in effect until the end of 2026. Therefore, Israeli and foreign investors have a narrow window of opportunity to receive tax benefits when investing in Israeli early-stage R&D startups.

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Barnea Jaffa Lande’s tax department has extensive experience representing Israeli and multinational high-tech companies and is at your service to provide comprehensive legal services during acquisition and sale transactions of high-tech companies.