109 / 120
/109/
to raise capital and attract new investors. If accepted, the Bill will allow increasing the
dilution of the existing shareholders, cash payments to shareholders and other reliefs.
Encouragement of Capital Investments Law
Encouragement of Capital Investments Law, 1959 (“Law”) is intended to encourage
capital investments and economic initiative. The Law grants tax benefits to preferred
enterprises that meet certain requirements, including reduced corporate tax rate of
16% and 9% and reduced withholding tax rate of 20%.
The proposed budget for 2017-2018 (“Budget”) wishes to introduce changes in the
Law to encourage foreign investments; to make Israel more attractive to international
high-tech companies and to attract the development and registration of intellectual
property in Israel.
According to the Budget, preferred technological enterprises will be taxed at 12% on
revenue attributable to the intellectual property and a special preferred technology
enterprise will be taxed at 6% where the total consolidated annual revenue of the
parent company exceeds NIS10 billion. Respectively, it is further proposed to impose
a capital gain tax of 12% and 6% on a sale of intellectual property to a foreign affiliate
company. Additionally, withholding tax on dividends from these revenues to foreign
companies will fall to 4% instead of 20%. In order to benefit from the reduced tax
rates, such company should meet certain conditions relating to its investment in
research and development in Israel.
Taxation of Reverse Vesting and Holdback Payments
In recent years, as part of the process by start-up companies to raise capital, certain
mechanisms aimed at maintaining and strengthening the relationship between a
company’s founders/key persons and the investors have become widespread.
A widely used mechanism is the reverse vesting (“Reverse Vesting”) where shares
issued to founders or key personnel will be vested upon a certain period of time,
and in the event of early termination of their employment, the company or the other
shareholders shall repurchase the unvested shares for no consideration or for their
nominal value. The Holdback mechanism is commonly used in an exit transaction. In
order to retain the founders and key personnel of the target company, they will receive
the compensation for their shares over a certain period of time, during which they will
be required to keep their current position in the company.
In many instances, the ITA argued that gain derived from the sale of those shares
should be classified as income derived from labor, which is taxed at a marginal tax rate
of up to 50%.
In June 2016 the ITA published a draft circular presenting the ITA's position with
respect to the terms and conditions under which a sale of shares subject to these
mechanisms will be treated by the ITA as resulting in capital gain, taxed at 25% or 30%.
According to the circular, if certain conditions are met, the sale of shares subject to a
Reverse Vesting or Holdback shall be treated as capital gain rather than income from
employment.
Digital Economy
In recent years there has been a substantial growth, worldwide, in the digital economy.