Israel - Temporary tax incentives granted for hi-tech sector

A newly enacted law (Law for Encouragement of Knowledge-Intensive Industry) aims to maintain Israel’s status as an attractive investment destination for high technology companies by granting tax incentives to investors and to companies for purchasing (or merging with) other hi-tech companies. The “Angels law”—as the law is informally called—includes measures to encourage investment in start-up companies and the acquisition of Israeli or foreign hi-tech companies, as well as financing benefits. Qualifying companies have a three and a half year-window to benefit from the incentives, i.e., the incentives are available from 31 July 2023 through 31 December 2026. 

Tax credit for investment in start-up companies

An investor in an Israeli R&D hi-tech start-up company (as defined in the relevant law) will be entitled to a tax credit in the year the investment is made where the shares are allocated to the investor by the company. The credit will be an amount equal to the invested amount multiplied by the capital gains tax rate that would have applied to the investor had they sold the shares allocated in the year of the investment. 

The incentive applies to individual investors, investors via a closely held company and individuals investing through a partnership where the amount of the investment does not exceed NIS 4 million (subject to some exceptions) and the investor meets the requirements relating to a minimum holding in the capital of the target company and a holding period.  

For purposes of calculating capital gains on the disposal of the shares of the R&D company, an investor that receives the tax credit may deduct the amount of the initial investment upon which the credit is based from the cost basis or price of the shares purchased.  

Both the target R&D company and the investor must notify the Israeli tax authorities if the above requirements are not met. 

Deferral of capital gains tax

In calculating capital gains derived by an individual from the disposal of shares in a preferred enterprise that owns a preferred technological plant, the individual will be able to deduct the cash amount paid for the investment from the proceeds received on the sale.

The deductible amount for each investment will be the lesser of the cash amount paid for the investment in the R&D company, or NIS 5.5 million, less other investment amounts in R&D companies for which the individual has received a deduction or credit. To benefit from this incentive, the share sale agreement must be concluded during the term of the new law and the reinvestment must be made within 12 months after the date the agreement is signed or four months before that date.

Upon the sale of the shares in the R&D company, an amount may be deducted from the original cost price in the amount of the real capital gain derived from the previous sale and which was not taxed due to the above deduction, provided the investor held the shares for at least six months from the date of the investment and if the sale is to a "relative," the shares were held for "the benefit period" as defined in the law. 

Expense deduction for investment in company shares

A hi-tech company that acquires another hi-tech company will be able to deduct the expenses incurred on the share purchase if the following requirements are met: 

  • The target company is a qualifying Israeli or foreign company;
  • The target’s intellectual property is transferred to the purchasing company;
  • The net purchase amount for the shares is at least USD 20 million; and
  • In the year in which control was achieved, the purchasing company is a “preferred company” with a technological plant.

If these requirements are met, the investor may amortise the purchase costs of the shares in equal amounts over a five-year period starting from the year of the acquisition.

It should be noted that this section of the law in particular contains intricate details and conditions and should be analysed carefully before an investment is undertaken.

Withholding tax exemption on interest paid to a foreign financial entity

To encourage foreign financial institutions to grant loans to hi-tech companies in Israel, qualifying companies may be entitled to a tax exemption for interest income (as well as income from original discount and foreign exchange gains) received on the loans. The following conditions must be fulfilled to benefit from the withholding tax exemption:

  • The foreign lender qualifies as a foreign financial entity as defined in the law;
  • The foreign lender is resident in a country that has concluded a tax treaty with Israel;  
  • Neither the lender nor any of its affiliates have a permanent establishment in Israel that is engaged in the business of providing large loans; 
  • The borrower company's hi-tech income in the tax year preceding the loan period exceeded NIS 30 million; 
  • The cash loan granted is at least USD 10 million; 
  • The loan is used to finance the company’s activities, including the purchase of other companies; and 
  • The company notifies the Israeli tax authorities of the loan in the manner and within the time period set out in the law. 


The legislation may have other requirements and/or reservations so persons wishing to benefit from the incentives should be familiar with the rules and seek professional advice where needed.

Erez Eini
Israel Levy
BDO in Israel