Amid internal crisis, Israel fights to retain hi-tech industry with tax benefits

Israel’s parliament approved the so-called "Angels Law" on Tuesday, granting tax benefits to investors in the local high-tech industry as well as incentives for purchasing other tech companies if the intellectual property is registered in Israel and their operations are based in the country. The new legislation comes on the backdrop of growing fears in Israel that startups will choose to relocate outside of the country. 

Past legislation already offered Israeli startups some tax benefits, such as tax reductions on startup investments in the period spanning 2012 to 2019. The new law offers the Israeli high-tech sector incentives in several domains. Private investors in startups will be eligible for considerable tax benefits. For instance, a tax credit will be available for investments of up to 4 million shekels ($1 million). Unlike under past legislation, the tax benefits take effect immediately upon investment. The idea is to encourage first investments in startups, which generally carry a high level of risk for investors.

Also, those who sell their companies and use the proceeds to invest in local startups could enjoy tax payment deferment. Large tech companies that purchase other Israeli-based companies can now spread out tax payments over five years. Investments of up to 5.5 million shekels ($1.5 million) will be eligible for tax reductions.

On the subject of credit, the new legislation encourages foreign financial institutions to lend money to Israeli startups. It exempts these institutions from paying Israeli taxes on the interest paid by Israeli high-tech companies on their business loans. There are currently very few Israeli financial resources specializing in loans to high-tech companies, so Israeli high-tech firms and startups often turn to foreign financial institutions for loans. The loans are often expensive because of the taxes the lending institutions must pay in Israel. 

The bill's explanatory note says that until the past few months, the Israeli high-tech industry has been strong in investments and salary levels.

However, the note adds, "Despite these encouraging indicators, the competition between countries over the location of firms' activities, mainly in the technological sector, and over the location in which their revenues are registered requires allocation of resources to keep Israel as an attractive destination for investments."

The Angels Law has been in the works for three years now. Its explanatory note does not refer to the ongoing high-tech crisis in Israel brought about by the government's judicial overhaul plan. The introduction of this new law came only one day after the Knesset approved the plan's "Reasonableness Clause," removing the Supreme Court's oversight on government decisions and nominations.

With the advancement on the overhaul Monday, many within the high-tech industry are reported to be considering relocation outside of Israel. A report published this week by StartupBlink, a global research firm mapping startup ecosystems, places Tel Aviv at the top of the list for startup flight in 2023. The report says that Tel Aviv is now considerably behind its competitors in terms of business climate. 

Chairman of the Israeli Innovation Authority Ami Appelbaum has been warning for several weeks of just such a danger. In an interview with Army Radio Wednesday morning, Applebaum said, "Over 90% of the capital invested in high tech comes from abroad. In fact, even most of the finances of the Israeli capital funds come from outside of Israel. We must remember that most of what is produced by Israeli high tech is exported. If Israel’s image is damaged, if foreign investor groups stop investing and if foreign companies no longer want to do business with Israeli companies, the Israeli high-tech industry will simply suffocate. It will be left without investments and without clients."