The Angels Law — Tax Benefit for Investors in Israeli Startups

Category: Startups | Reading time: approx. 7 minutes

In recent years, the State of Israel has consistently acted to encourage private investment in startups, recognizing that the hi-tech industry is the country's main growth engine. One of the most significant tools introduced for this purpose is the Angels Law — the popular name of the Encouragement of Knowledge-Intensive Industry Law, 5783-2023 (in short: the "Encouragement of KI Industry Law" or "KII Law"), which replaced the original 2011 Angels Law. The law provides a substantial tax benefit to an individual investor injecting capital into an eligible startup — making it possible for startups to raise early-stage capital, when risk is highest.

Legal Background — From the Old Law to KII Law 2023

The original Angels Law, anchored in the Economic Policy Law for 2011 and 2012, operated as a temporary order and was extended several times. In 2023, the Knesset enacted the KII Law as a stand-alone law that expanded the scope of benefits and adapted them to the realities of Israel's mature hi-tech industry. Key features:

• In force until December 31, 2026 (with possible extension — as has happened with previous temporary orders).
• Three parallel benefit tracks: direct equity investment, investment in a "promoting" startup, and acquisition of a foreign hi-tech company by an Israeli company.
• A flexible statutory base allowing the Innovation Authority to set professional rules on what constitutes an "eligible startup."

Eligibility Conditions — Who Is a "Suitable Investor"?

Not every investment in a startup qualifies for the benefit. The law specifies precisely:

The Investor

• An individual Israeli resident (not a company).
• Investment in cash and equity — not a loan, not services.
• Holding shares for at least 3 years from the date of investment.
• The investor is not a "related party" of the company (not a relative of the founders, and not a pre-existing controlling shareholder).

The Startup Company

• An Israeli-resident company classified as an R&D company.
• R&D expenses constitute at least 70% of its expenses.
• Cumulative fundraising within a defined ceiling (millions of shekels, depending on the track).
• Received a pre-ruling from the Innovation Authority as qualifying for the track.

Types of Benefit

The law offers three main benefits:

1. Investment offset as an expense (Section 20A of the KII Law) — the investor can deduct the full investment amount (up to a ceiling of approximately ILS 4 million per company) from taxable income, spread over three years. In simple terms: an ILS 1 million investment may reduce the investor's tax liability by approximately ILS 470,000 (at a 47% marginal rate).
2. Reduced capital-gains tax — on future sale of the shares, eligibility for a lower tax rate (subject to conditions).
3. Tax deferral on a "share swap" — when an Israeli company acquires a foreign hi-tech company, the founders may defer tax on the capital gain at the time of sale.

Obtaining the Benefit — The Process

1. Preliminary eligibility check — examination of whether the company and transaction meet the conditions. Critical before closing the investment.
2. Pre-ruling — filing an application with the Innovation Authority for an approval that the company qualifies as an eligible startup.
3. Investment agreement — signing in accordance with the law's requirements (3-year holding commitment, nature of investment, etc.).
4. Reporting to the assessing officer — filing the dedicated form in the investor's annual return (Form 875), accompanied by the Innovation Authority's approval.
5. Spreading over 3 years — offsetting the expense against taxable income across the relevant tax years.

Numerical Example

Suppose an individual investor with high annual income (47% marginal tax) invests ILS 1,000,000 in an eligible startup in January 2026:

• In 2026 they can deduct ILS 333,333 from taxable income — tax saving of approximately ILS 156,666.
• Same scenario in 2027 and 2028.
• Total cumulative tax saving: approximately ILS 470,000 on a one-million-shekel investment.
• That is, the effective cost of the investment is only about ILS 530,000 — while the investor holds shares at their full value.

Risks and Things to Know

• Loss of eligibility on early sale — sale before 3 years triggers Recapture and interest payment.
• Failure to meet R&D conditions — if the company falls below the 70% R&D-expense criterion, eligibility may be retroactively revoked.
• Related party — investment by a family member or existing stakeholder disqualifies eligibility.
• Investment through a corporation — companies are not eligible, so the investment must be made in the individual investor's name.
• Investment ceiling — there is a ceiling on the investment amount per company and per investor — exceeding it means the excess does not qualify.

Summary

The Angels Law (KII Law 2023) is a real opportunity for private investors to reduce by tens of percent the effective cost of their investment in Israeli startups. That said, the conditions are complex, dealings with the Innovation Authority require expertise, and a mistake in documentation or agreements can nullify the benefit. Professional planning, a properly arranged set of approvals, and accompaniment throughout the holding period — are the key to ensuring the benefit is fully realized.