Written by Ofir Levy and Ofir Paz
Background
On January 29, 2025, the Israeli Tax Authority published guidelines outlining its updated position on the taxation applicable to investments in a company through a SAFE (Simple Agreement for Future Equity). This follows the expiration of the previous guidance issued by the Tax Authority on May 16, 2023, which was valid until December 31, 2024.
The Updates
The updated guidance is largely based on the previous guidance and details the conditions under which an investment in a company through a SAFE transaction will be considered an advance payment for shares. In such cases, it will not constitute a taxable event for the investor and will not create a withholding tax obligation for the company.
The updated guidance includes several changes and clarifications compared to the previous guidance, some of which ease the requirements imposed by the Israel Tax Authority, while others impose stricter requirements. Below is a non-exhaustive list of the key updates in the revised guidance:
- Increase in SAFE Investment Amount – The largest permitted investment amount for a single investor under a SAFE agreement has been increased from ILS 40 million to USD 20 million. Investments larger than that may not qualify for the relief provided by the guidance.
- Clarification on Mandatory SAFE Conversions – The updated guidance includes a new clarification stating that when a financing round raises an amount exceeding (i) 40% of the company’s fully diluted share capital or (ii) 10 times the cumulative amount of the company’s outstanding SAFE agreements, it constitutes an “equity financing event” that mandates the conversion of the SAFE into shares.
- Expansion of the Option for SAFE Conversion at a Pre-Determined Date – While the previous guidance allowed for the conversion of SAFEs at a pre-determined date at the last fundraising valuation without a discount, the updated guidance introduces an alternative. Under this alternative, the conversion may take place at a pre-determined date specified in the SAFE agreement, based on a valuation agreed upon in advance (which may be a fixed amount, or the share price in the last or next fundraising round, either without a discount or with a pre-determined fixed discount).
- Clarification on Discount Cases (Up to Three Tiers) – The previous guidance established the condition that the investor’s discount rate should not vary as a linear function of time. In the updated guidance, this condition remains unchanged. However, a new clarification has been added, stating that the provision in a SAFE agreement of up to three discount tiers, where the discount rate at each tier may be conditioned on a time-based function or milestone achievement, will not be considered a violation of the guidance. Nevertheless, it was clarified that no additional discount can be provided beyond the maximum discount rate in effect as of 3 years following the date of execution of the SAFE agreement.
Application
The updated guidance shall apply to all SAFE transactions signed or to be signed between companies and investors from January 1, 2025, to December 31, 2026, or until the publication of a new directive by the Israeli Tax Authority, whichever is earlier.
Additionally, the updated guidance may be used to clarify the provisions of the previous guidance (that applies to SAFE transactions signed before January 1, 2025).
This publication is provided as a service to our clients and colleagues, with explicit clarification that each specific case requires individual examination and discussion in writing.
The information presented here is of a general nature and is not intended to answer the unique circumstances of any individual or entity. Although we strive to provide accurate and available information, we cannot guarantee the accuracy of the information on the day it is received, nor that the information will continue to be accurate in the future. Do not act on the information presented without appropriate professional advice after a comprehensive and thorough examination of the specific situation.
