Intro
Welcome to the third installment in our series of articles providing an overview of the various aspects relating to the venture lending industry in Israel, including some of the legal, commercial and regulatory factors that should be taken into consideration by anyone looking to enter into this realm. The main goal of this series is to equip readers with valuable knowledge and understanding of the venture lending landscape in Israel, helping them navigate and capitalize on the unique opportunities it presents, particularly for those looking to become stakeholders in the Israeli startup ecosystem. In our third installment below, we provide an overview regarding certain tax considerations for foreign lenders when providing a loan to an Israeli technology company.
Withholding Income Tax on Interest Payments
In accordance with the Israeli Tax Ordinance, 5721-1961 and the regulations promulgated thereunder, any interest payment made by any Israeli loan party to a non-Israeli lender entity (non-individual) is generally subject to Israeli withholding tax at corporate tax rate (23% as of 2025), which may be reduced by an applicable tax treaty, provided, inter alia, that the lender is entitled to tax treaty benefits.
For example, under the tax treaty signed between the U.S. and Israel, interest payments made by an Israeli loan party to a U.S. resident bank, savings institution, insurance companies and similar entities with respect to a loan granted by such U.S. resident entity to the Israeli resident loan party may generally be subject to a reduced withholding tax rate of 10% when certain conditions are met, and as for other U.S. entities (such as hedge funds and private equity funds) – 17.5%.
However, tax treaty treatment is not automatic and the lender and/or the Israeli loan party will need to apply to the Israeli Tax Authority (the “ITA”) for a reduced withholding tax rate under the applicable tax treaty. Such certificates for reduced withholding granted by the ITA require providing the ITA with applicable information about the transaction and the parties involved and typically such certificates need to be refreshed on an annual basis. Some Israeli based foreign lenders have received special tax rulings from the ITA, but this is an extensive process and typically only available to serial lenders in the Israeli market. In order to mitigate the economic loss, many lenders include a gross-up provision in their loan agreements ensuring that the amounts payable to them shall be ratably increased so that following any required withholding, the net amount received will be the same as if there was no withholding obligation. This is a material commercial point and it is recommended to negotiate this point already at the term sheet stage so that there are no surprises in the definitive agreements. Withholding in venture lending transactions is a complex issue as the ITA has lately been scrutinizing exit transactions and can also in some cases take a position that the warrant and other similar equity kickers commonly granted as part of a lending transaction may be classified as debt and subject to tax withholding on the deemed interest related component. We note that the ITA’s position on the equity component of venture loans is an evolving position.
VAT
As of January 2025, the current rate of VAT in Israel is 18%, with VAT applying to Israeli sourced loans with respect to payments of interest and various fees. While interest payments for example typically require VAT to be paid as well, this is not typically a concern for Israeli borrowers, as they routinely are able to offset such payments.
New “Angels Law”
In July 2023, a law encouraging “knowledge intensive” industry was enacted in Israel (the “Angels Law”). Among other things, the Angels Law grants tax benefits to investors in the Israeli high-tech industry, as well as incentives for purchasing other tech companies if the intellectual property is registered in Israel and their operations are based locally. In addition, the Angels Law also provides a full tax exemption with respect to the payment of interest on loans provided by certain foreign financial institutions to eligible Israeli tech companies, subject to various cumulative conditions, including, among others: (i) such target company’s technology income in the tax year preceding the provision of the loan was over NIS 30M, and (ii) the loan amount is at least $10M. In addition, there are certain conditions which apply to the identity of the lender which must be approved and confirmed by the ITA including but not limited to (i) the main business of the lender is providing credit and not equity, and (ii) such lender does not have a permanent establishment in Israel whose business is providing significant loans.
The above conditions make it difficult for the average venture lending transaction in Israel to qualify for a withholding exemption under the Angels Law. The Angels Law is currently meant to remain effective until December 31, 2026.
Conclusion
Tax structuring in Israeli venture lending transactions is of utmost importance for the reasons explained above. It is important to map these issues out early on and to work closely with the borrower and their local tax advisors. It needs to be considered whether the Israeli entity should be a co-borrower or guarantor and how this may or may not affect the tax analysis.
About Us
Arnon, Tadmor-Levy proudly stands among Israel’s most prominent law firms, with one of the largest and most respected banking and financial services departments. We have extensive experience in cross-border and other complex financing transactions, representing both lenders and borrowers. Our trusted reputation spans a vast clientele, including leading Israeli and international banks and other financial institutions.
Our venture lending and private credit team is led by Simon Weintraub, Avi Anouchi and Idan Adar.
Also, please feel free to reach out to our tax partner Ofir Levy. Should you have any questions, or are interested in learning more about the various aspects of the Israeli venture lending and private credit industry, please feel free to reach out to a member of our venture lending team, whose details are included below.
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.
