In light of the decrease in “seed” investments in recent years, the Israeli Ministry of Finance initiated the Economic Policy for 2011-2012 Law (Legislative Amendments), 5771-2011, also known as “The Angels Law”, which was legislated as a temporary order and came into force in January 2011.
According to the provisions of the above temporary order, each investment made by an Israeli citizen in a company that meets the definition of a “research and development (R&D) company” will be recognized as a tax deductible expense, which applies for various kinds of income, as opposed to current tax provisions, in which an investment is recognized as a tax deductible expense only in an M&A event or in the event of a liquidation of the company.
Nevertheless, there are several conditions stipulated in the above order that are likely to cause a conflict of interest between an investor and the company. For example, a condition requiring that 70% of the company’s expenses shall be contributed towards research and development. A more significant requirement is that the company’s revenues shall not be higher than 50% of the research and development expenses.
In our view, above provisions might position the company and the investor in a conflict of interests, for obvious reasons, therefore hindering the main goal, which is incentivizing investors in technological enterprises.
In view of the aforesaid, our opinion is that the above order is an important step in the right direction, although taking into consideration the different interests involved, one should consider adjusting its provisions to meet the industry challenges.