The Angels Law (KII Law)

The KII Law Is the Angels Law

The KII Law — the Encouragement of Knowledge-Intensive Industry Law (Temporary Provision), 5783-2023, also known as the Angels Law — is a significant step toward encouraging private investment in young Israeli hi-tech companies. The law grants a tax benefit to private investors ("angels") who come in at the early stages of a startup, with the aim of channeling capital into high-risk ventures and supporting the growth of the local hi-tech industry. In this article we review the law and its advantages, highlight the decisive contribution of CPA Amir Gonen to shaping and advancing the law, and present his current involvement as a tax partner at Hager-Alperowitz & Co. We also give credit to the government bodies that were partners in the success of the move — the Israel Tax Authority, the Budget Department and the Israel Innovation Authority.

The Angels Law — Background and Significance

The first Angels Law was set out in Chapter 7 of the Economic Policy Law for 2011 and 2012: it allowed an individual investor to deduct from total income an investment of up to ILS 5 million in an R&D company, over a benefit period of three tax years, and it applied to investments made by 31 December 2019. After a break of several years, in July 2023 the Knesset enacted the new law — the Encouragement of Knowledge-Intensive Industry Law (Temporary Provision) — which took effect on 31 July 2023 and applies until 31 December 2026. The law is intended to keep Israel an attractive center for hi-tech investment, against the background of a decline in investment and concern about entrepreneurs moving abroad.

It is important to note that the Angels Law does not deal only with angel investments. It has four tracks:

• A tax credit for an investor in an R&D company — the heart of the law, and the focus of most of this article (section 2).
• "Rolling over" a capital gain from an exit — an individual who sold, at a gain, shares of a preferred company that owns a technological enterprise, and invested in an R&D company within 12 months after signing the sale agreement (or up to four months before it), may deduct the investment from the consideration and defer the tax — up to ILS 5.5 million per company (section 3).
• Deducting the cost of acquiring a technology company — a preferred company that owns a technological enterprise and acquired control (at least 80%) of a qualifying Israeli or foreign technology company may deduct the net acquisition amount from its preferred technological income over five years (section 5). Under regulations issued in July 2026, from 2026 it may elect a tax credit instead of the deduction.
• An exemption from tax on interest paid by a preferred company that owns a technological enterprise to a foreign financial institution, on a loan of at least USD 10 million (section 6).

Read our full article: The Capital Investment Encouragement Law — Who Is Eligible and What the Benefits Are →

The Investor's Benefit: A Tax Credit

At the heart of the law is a tax credit for anyone who invests cash in a young R&D company and receives shares in return. An investor may be an individual, a closely held company, or a partnership established for a dedicated investment in a single company whose partners are individuals or closely held companies.

The credit equals the investment amount multiplied by the capital-gains tax rate the investor would have paid had they sold the shares at a gain in the year of the investment (section 2(c)):

• Individual — generally 25%, and 30% for a "substantial shareholder" (holding 10% or more of the company).
• Closely held company — the corporate tax rate, 23%.
• An investor liable that year for surtax (the additional tax on high incomes) receives an addition to the credit for that component.

For example, an individual who invests ILS 100,000 and holds less than 10% of the company receives a credit of ILS 25,000; with a holding of 10% or more — ILS 30,000.

The credit reduces the tax the investor owes for the investment year, regardless of the source of income — salary, business, rent or capital gains. A credit not used in that year carries forward to the following tax years until it is fully used (section 2(d)).

Ceiling: the qualifying investment is capped at ILS 4 million per investor per company — including investments in the same company by the investor's relatives (such as a spouse, parents, children or siblings) that received a benefit under the law. For an individual at 25%, this means a credit of up to ILS 1 million per company.

The Company's Eligibility Conditions (an "R&D Company")

For the investment to qualify, all of the following conditions must be met by the company at the time of the investment (section 1):

• The company was incorporated in Israel, its main activity is in Israel, and it is not a subsidiary of another company.
• None of its securities has ever been listed for trading on a stock exchange.
• Its technological income, from incorporation until the end of the year preceding the investment year, did not exceed ILS 4.5 million, and its total income in that period did not exceed ILS 12 million.
• The total investments in the company and loans it received since incorporation did not exceed ILS 12 million.
• Its R&D expenses in the last three years averaged at least 7% of its income, and it meets at least one of the alternative conditions set for a "preferred technological enterprise" under the Capital Investment Encouragement Law.
• At least 70% of its expenses, from incorporation until the end of the previous year, were spent — directly or indirectly — on developing an intangible asset (technology, intellectual property) based on R&D carried out in the company.
• The asset under development and all rights in it have been owned by the company since its creation — or the company acquired it in full from the founders themselves or from an academic institution, research institute or hospital.

The company's CPA confirms that the company met the conditions (section 2(b)(2)). This is a material condition, so eligibility should be examined before closing the investment round — not after.

Conditions for the Investor and the Investment

• The investor paid the full investment amount in cash, and the company allotted shares to them — both by 31 December 2026.
• The investor was not a "relative" of the company from its incorporation until the investment — among other things, did not hold (alone or together with others) 25% or more of any means of control in it.
• The investor holds the shares directly throughout the benefit period: from the tax year in which the investment was made until three years after the investment date. An involuntary sale, or a sale approved by the Director upon a request filed within 90 days, does not harm the benefit.
• Tax avoidance or improper tax reduction is not among the main purposes of the investment.
• The investor notified the Tax Authority that they are claiming the benefit, in a notice attached to the annual return filed in the year after the investment year.
• Any amount the investor receives from the company until the end of the benefit period, directly or indirectly, reduces the qualifying investment — except payment for business services to someone who is not an employee or officer of the company.

Read our full article: Annual Tax Report — Who Must File, Deadlines and What to Attach →

The Angels Law — Can the Benefit Be Lost?

Yes, at two stages. First, a company that exceeded the conditions before the investment — for example, it has already raised (in investments and loans) more than ILS 12 million — is not an "R&D company", and the new investment will not qualify. Companies approaching the threshold should therefore plan their funding rounds in advance, so as not to lose eligibility at a critical stage of growth.

Second, until the end of the benefit period the company must continue to meet the core conditions — among them, 70% of its expenses on developing the asset, the R&D-to-income ratio and ownership of the intellectual property — and a CPA's confirmation of this must be attached to its annual return every year (section 2(b)(6)). The law also counts expenses incurred "indirectly" for development, so classifying expenses calls for a professional review in advance.

If a condition ceases to be met, the company must report it to the investor and to the Tax Authority, and the investor must notify the assessing officer within 90 days. The assessing officer will cancel the credit retroactively, and the investor will pay the tax plus linkage differentials and interest. A company that failed to report may itself be charged the amount of the credit (section 2(h)).

The Financial Implications of the Angels Law

The law is intended to encourage private investment in technology and is expected to increase the number of investments in startups, which may accelerate the growth of Israeli technology companies. As a result, private investors will become more significant players in the venture-capital market. This special law also affects the state's cash flow: on the one hand, the tax benefits may reduce the state's tax revenue in the short term; on the other hand, in the long term, the success of startups may increase state revenue through taxes on profits, employee salaries, and sale and exit transactions.

A change in investor behavior is another point we are witnessing: the law may attract private investors who have never invested in technology, including investors from other sectors. In addition, the Angels Law can create an incentive for longer-term investment instead of short-term speculative investment.

The law also affects how startups raise capital: they may prefer raising from angels over venture-capital funds, especially if investors receive better tax benefits from a private investment. This may increase competition between types of investors and improve fundraising terms for entrepreneurs.

The Angels Law — Control Mechanisms and Preventing Abuse

Are there mechanisms to prevent aggressive tax planning through the law? Past experience teaches that whenever significant tax benefits are offered, there is a concern of over-use and sophisticated tax planning. Possible risks then arise, such as fictitious investments — a scenario in which investors buy shares of a company they control, or carry out circular transactions, to enjoy the tax benefits without making a real investment. Moreover, aggressive tax planning uses legal mechanisms to circumvent the intent of the law and maximize the benefits without real risk. At times there are even attempts to bring irrelevant investments — such as companies that are not truly technology startups — under the law's definition in order to obtain tax benefits.

The control mechanisms in the law
The legislator built several layers of protection: a CPA's confirmation that the company meets the conditions at the time of the investment and in every year of the benefit period; disqualifying an investment by a "relative" — including anyone holding 25% or more of the company — to prevent investment in a company the investor already controls; a duty to hold the shares throughout the benefit period; reducing the qualifying investment by any amount that flows back to the investor from the company, to prevent circular transactions; an investment ceiling of ILS 4 million per company; and a general clause under which tax avoidance must not be among the main purposes of the investment. In addition, a company that fails to report a breach of a condition may itself have to pay the amount of the credit.

Conclusion: for the law to achieve its purpose without causing unnecessary losses to the state treasury, it is important to apply effective control mechanisms and to ensure that the benefits go only to genuine investors, angels and startups.

The Angels Law and Its Implications for Venture-Capital Funds

Will the funds be affected by the increase in private investment?
The new Angels Law may affect venture-capital funds in several ways. Positive effects include growth in the number of funded startups: the more startups receive early-stage funding, the more companies become ripe for venture investment at later stages. The law can also improve the discovery of quality investments — funds may benefit from private investments acting as a screening mechanism, so that they invest only in startups that have already proven themselves.

Negative effects on venture-capital funds
Competition with angels — if private investors receive significant tax benefits, they may be willing to invest on better terms for the startup, making it harder for venture-capital funds to secure good deals. We also anticipate startups putting off raising from funds, preferring private investors in order to keep more control and not give up management rights. Conclusion: the law's effect on venture-capital funds depends on the balance between the incentives for private investors and the attractiveness of the funds in terms of support and strategic guidance.

Comparison with International Legislation

Laws encouraging investment in startups exist in other countries as well, and each country implements them according to its own economic structure.

United States — QSBS
The QSBS (Qualified Small Business Stock) regime allows a partial or full exemption from capital-gains tax on the sale of shares in small companies held for a minimum period, subject to conditions.

United Kingdom — EIS and SEIS

• Enterprise Investment Scheme (EIS) — income-tax relief of 30% of the investment, and an exemption from capital-gains tax on the sale of the shares when the conditions are met.
• Seed Enterprise Investment Scheme (SEIS) — for very young companies, with income-tax relief of 50% of the investment.

The Israeli law is similar in its goals to the American and British schemes, but the mechanism differs: in Israel the investor receives a tax credit at the capital-gains rate already in the investment year, and on a successful sale the benefit "comes back" through the reduced cost — whereas in the UK the EIS combines income-tax relief with a capital-gains exemption on sale. It is worth considering whether the benefits should be expanded to make investing in Israel more attractive relative to competing markets.

Summary

The new Angels Law — the Encouragement of Knowledge-Intensive Industry Law — is a positive step toward encouraging technology investment in Israel: an investor in a young R&D company receives a tax credit at the capital-gains rate — for an individual generally 25% or 30% of the investment, on investments of up to ILS 4 million per company. But the benefit depends on a series of conditions — in the company, in the investor and in holding the shares — and it is important to make sure all of them are met throughout the benefit period. The law applies to investments made by 31 December 2026. If you are entrepreneurs raising funds under the law, or private investors who want to enjoy the benefit — contact us and we will be glad to help.

The above article does not constitute a recommendation, professional advice or a legal opinion. If you have any questions, you are welcome to contact us — we will be happy to advise, accompany and represent you before the Israeli tax authorities.

Kind regards,
Hager-Alperowitz & Co. — Certified Public Accountants