After a series of legislative amendments in favor of the high-tech industry were not included in the Arrangements Act last year, the government continues to advance them in a standard legislative process. Today (Sunday), the Ministerial Committee for Legislation, which formulates the ministers’ position regarding bills, is expected to discuss the amendments to the legislation in favor of high-tech. The amendments were passed into ordinary legislation by agreement between Prime Minister Naftali Bennett, Finance Minister Avigdor Lieberman and Minister of Innovation, Science and Technology Orit Farkash HaCohen and if approved by the Ministerial Committee on Legislation they will enjoy the coalition’s support in Knesset votes.
According to the draft law to encourage knowledge-intensive industry, the tax loss to the state as a result of the implementation of the legislative amendments in question is estimated at NIS 65 million in 2022, NIS 75 million for 2023, NIS 85 million in 2023 and NIS 95 million in 2025.
In other words, the total cost is NIS 320 million for four years in which the regulations will apply as a temporary directive, after which they will be reviewed again by the government. A very small part of the amount, NIS 15 million in 2024 and NIS 25 million in 2024, is expected to come from a reduction in the budget of the Innovation Authority, the body in charge of promoting high-tech, or from carrying out other balancing activities.
The law of “angels” is repeated
The most controversial amendment to the legislation concerns the “Law of Angels.” The Angel Act was a temporary provision from 2012 to 2019, when it expired, and now the government is returning it in an expanded version. Under the proposed amendment, investors in start-up companies in the early stages will receive a tax credit of 25% of the amount of their investments. The amount of investment on which the exemption can be obtained will be up to NIS 3.5 million.
The investments that will be recognized for tax credit are In start-up companies that did not receive investments of more than NIS 12 million and their revenues do not exceed NIS 12 million. Needless to say, the investors who will benefit from the benefit are millionaires and multi-millionaires, as it is usually those who invest in start-ups privately.
Alternatively, precedent-setting, investors will be able to get a deferral of tax payment to a future date for capital gains generated from the sale of a technology company, if they invest the money back in young start-ups. For example, an investor who sold his shares in one start-up as a result of a company exit could transfer the amount to an investment in another company without paying tax on it. If the company in which the investor puts his money there is not successful and closes, in fact the state subsidized part of his loss by deferring the tax.
The criticism of this section stems from the fact that the ability to defer tax payment does not exist in other areas of investment. This benefit will flow as stated into the pockets of investors who are already in the top tier.
The goal: to strengthen the locomotive of the Israeli economy
A third amendment allows Israeli technology companies to be recognized as an expense for tax purposes in the acquisition of control of another, foreign or Israeli technology company. The cost of investing in the other company can be obtained as a tax expense at equal annual rates for five tax years after gaining control.
Finally, another amendment grants a tax exemption to a foreign financial institution for its income from interest, discount fees or linkage differences, which is paid to it by an Israeli technology company as a loan repayment. The purpose of this move is to lower the costs that technology companies pay for raising credit from foreign financial institutions.
The purpose of the repairs is to strengthen the high-tech industry, known as the locomotive of the economy, but it should be noted that it comes at a time of unprecedented prosperity and prosperity for start-ups. According to IVC’s report for the summary of 2021, Israeli start-ups raised $ 25.6 billion during this year – an amount almost 2.5 times higher than in 2020 and more than three times higher than in 2019. This boom has also been passed on to investors in start-ups who have recorded record returns on their investment in the last two years.
Specifically, the amendments to the law try to encourage young start-ups, in light of a continuing decline in the number of technology companies that are established in Israel every year, according to data from the Central Bureau of Statistics. But even here the data do not necessarily indicate a market failure that requires government intervention and assistance. According to the IVC report, for example, the number of capital raising by Israeli start-ups in the initial lime phase was 102 in 2021, an increase compared to 72 in 2020 and 82 in 2019. The average investment a startup received in the lime phase also rose from $ 3 million to $ 4 million in the past year. “After a slight decline in 2020, lime investors increased investments, especially Israeli investors,” the report states.
A proposal to the Ministerial Committee today states that the Deputy Attorney General (Economic Law) trusts his draft law and the Commissioner for Budgets in the Treasury does not oppose it.