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On May 16, 2023, the Israeli Tax Authority issued guidance regarding the taxation of investments in companies through the Simple Agreement for Future Equity (SAFE), which was introduced as an alternative to traditional investments or convertible loans for early stage investments in startups. SAFEs offer simplicity, efficiency and cost-effectiveness and enable the startup companies to raise funds quickly while maintaining the valuation question for a later stage.
In SAFE, the investor transfers funds to the company upon execution of the SAFE, with the conversion of the funds to the company’s shares at a later stage upon the occurrence of certain events (generally, qualified equity financing; non-qualified equity financing; dissolution or M&A/exit event). When investors convert their investments into shares, they gain a significant advantage by receiving a greater number of shares due to a predetermined discount on the share price or having their investment converted into shares based on a predetermined maximum valuation of the company.
Until recently, it was unclear whether this advantage is considered an interest income, resulting in a taxable event for the investor, or rather the entire transaction is seen as a unified investment with no tax event.
The guidance sets a “safe harbor” under which conversion of the investment amount, which has been invested through those SAFEs that satisfy the safe harbor requirements, to the company’s shares will be deemed investment in equity of the company for tax purposes. Accordingly, conversion of those SAFEs that satisfy the safe harbor requirements would not trigger a tax event for the investor. The guidance aims to provide clarity and guidance for stakeholders navigating the tax landscape in relation to SAFE investments.
To learn more about qualifying for the safe harbor, click here to read the complete article published by Dr. Ziv Preis of Ally Law member firm Lipa Meir & Co.
