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General Description

On 25 July 2023, the Knesset (the Israeli Parliament) passed the Law for Encouragement of Knowledge-Intensive Industry (Temporary Order) — 2023 (the "New Law") to encourage investments and acquisitions of Israeli (and in some cases, foreign) high-tech companies.

The New Law will remain effective for three and a half years, from 31 July 2023 through 31 December 2026.

The New Law provides five main incentives:

• Five-year amortization for net acquisition cost of an Israeli high-tech company
• Five-year tax amortization for net acquisition cost of a foreign high-tech company, subject to specific criteria
• Exemption from withholding tax (WHT) on interest payments that Israeli high-tech companies make to foreign financial institutions resident in countries with which Israel has concluded a double-tax treaty
• Tax credit mainly for individual investors who invest in an early-stage Israeli research and development (R&D) company
• Recognition of capital loss at the amount of the investment made by an individual investor in a high-tech company that goes public

Key Conditions

Details on the main conditions that must be met to benefit from each incentive follow.

Five-year amortization for net acquisition cost of an Israeli high-tech company:

• The acquiring entity must be an Israeli company with Preferred Technological Enterprise (PTE) status, as defined in the Law for the Encouragement of Capital Investments — 1959.
• The acquired target must be an Israeli company with a PTE or an R&D Company, as defined in the New Law.
• No ruling is required.
• Post-acquisition mergers are allowed during the amortization period (unlike under past versions of this law).
• Under certain conditions, gradual acquisition (stake by stake) will be accepted.

Five-year amortization for net acquisition cost of a foreign high-tech company:

• The acquiring entity must be an Israeli company with a PTE and an average technological income of at least 75m New Israeli shekels (NIS 75m) during the three years preceding the year of acquisition.
• The acquired target must be a foreign company with R&D expenses of at least NIS 20m, forming at least 7% of its revenue (this condition may be waived subject to a ruling).
• The acquiring entity must receive full ownership of the target's Intellectual Property (IP) as part of a transfer of trade.
• During the years of amortization, the acquisition must not result in a decrease of the level of activity in Israel by more than 20%.
• The acquisition must be direct and of at least 80% of the target for a price of at least $20m.
• Within 90 days from the acquisition date, a confirmation must be received from the Israeli Innovation Authority (IIA), and a notification must be filed with the ITA. The date of acquisition shall include any preliminary agreement, whether in writing or verbally, such as Memorandums of Understanding, Letters of Intent, Term Sheets, etc.

Exemption from WHT on interest payments an Israeli high-tech company makes to foreign financial institutions resident in countries with which Israel has a double tax treaty:

• The borrower must be an Israeli company with a PTE and eligible technological turnover of at least NIS 30m.
• The loan must be at an amount of at least $10m and intended to support the activity of the PTE, including acquisitions.
• No ruling or preapproval is required to avail this incentive.
• During the loan term, there must be no more than a 30% decrease in the activity of the Israeli borrowing company, as defined in the New Law.

Tax credit mainly for individual investors who invest in an early-stage Israeli R&D company:

• The incentive applies to individual investors and to individuals investing through a partnership (whether registered with the Israeli Partnerships Registrar or approved by the ITA) or through a company owned generally by up to five individuals.
• The tax credit amount is calculated as the investment amount multiplied by the capital gain tax rate applicable to the investor, capped at NIS 4m per investor per company.
• The target company must be an early-stage R&D Company and comply with several conditions, such as a limited amount of capital and debt raised and limited amount of technology revenue.
• No ruling from the ITA is required.
• The investor must comply with all conditions to be eligible for this incentive. The target is liable to properly notify the investor and the ITA if it fails to comply with conditions that apply to it.
• The investor may postpone payment of capital gain tax on disposal of one target's shares if the investor chooses to invest a subsequent investment in a second target company within a defined period of time.

Recognition of capital loss at the amount of the investment made by an individual investor in a high-tech company that goes public:

• Under certain conditions, an investment in a technological company made during its IPO by an individual investor shall be recognized as a capital loss up to NIS 5m.
• This revives an expired temporary order in the Israeli Tax Ordinance and extends the period for new investments, subject to the conditions set out in the New Law.

Implications

Israeli and multinational enterprises, and individuals intending to acquire or invest in Israeli or non-Israeli tech companies will want to consider the above incentives and consult on the relevant incentive route and its benefits before making any preliminary agreements for acquisition or investment in the Israeli high-tech sector.

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For additional information with respect to this Alert, please contact the following:

EY Israel, Tel Aviv

• Ziv Manor | ziv.manor@il.ey.com
• Yaron Kafri | yaron.kafri@il.ey.com
• Sigal Griba | sigal.griba@il.ey.com

Ernst & Young LLP, Israeli Tax Desk, New York

• Mark Alon | mark.alon1@ey.com

Published by NTD's Tax Technical Knowledge Services group; Carolyn Wright, legal editor