Deal Structures: Familiar Territory
U.S. investors will find that the terminology and deal structures used in Israeli venture capital transactions are broadly familiar. Israeli tech startups are typically structured as private companies limited by shares and are commonly incorporated either as Israeli private companies or as Delaware C corporations, depending on their target market and investor base. Founders and employees usually hold ordinary shares, while investors receive preferred shares with preferential rights customary in U.S. venture capital transactions, including liquidation preferences, anti-dilution protection, and board representation.
At the earliest stages, Israeli startups commonly raise initial capital through a SAFE (Simple Agreement for Future Equity) or a similar convertible instrument before proceeding to a priced seed round. Later financing rounds generally follow familiar U.S. conventions, where the main governance points are also familiar, and typically include board composition, voting thresholds, pre-emptive rights, rights of first refusal, co-sale rights, and information rights.
Key Tax Considerations for U.S. Investors
For a U.S. investor, tax outcomes often depend not only on the economics of the investment, but also on the holding vehicle. In practice, the key distinctions are between investing as a U.S. individual, a U.S. corporation or a U.S. LLC.
Capital gains. Non-Israeli investors may often be exempt from Israeli capital gains tax on a sale of shares in an Israeli company, provided certain conditions are met, including that the investor is not an Israeli tax resident, does not maintain a permanent establishment in Israel, and did not acquire the shares from a related party. Many venture capital funds investing in Israel obtain tax rulings to help exempt their non-Israeli investors from Israeli withholding and reporting obligations.
Dividends. Dividends paid by an Israeli company to a non-Israeli investor are generally subject to Israeli withholding tax, typically 25% and, in some cases, 30% for substantial shareholders. The Israel-U.S. tax treaty may reduce that rate for eligible U.S. residents, and a U.S. corporate investor may qualify for a lower rate still. U.S. LLCs can present added complexity: because an LLC is often treated as fiscally transparent for U.S. tax purposes, it may not itself qualify for treaty benefits, and Israeli treatment may vary depending on the facts and the approach of the relevant assessing office.
U.S. tax considerations. From a U.S. tax perspective, a direct investment by a U.S. individual in an Israeli company may involve additional complexity, including possible controlled foreign corporation and passive foreign investment company issues, as well as extensive U.S. information reporting obligations.
For these reasons, U.S. investors should consult Israeli and U.S. tax advisers early in the investment process so that the holding structure can be evaluated and optimized for their particular circumstances.
The above content is a summary provided for informational purposes only and does not constitute legal advice. It should not be relied upon without obtaining further professional legal counsel.
