On January 29, 2025, the Israel Tax Authority published updated guidelines regarding the tax treatment of SAFE investments, replacing the previous guidelines from 2023. Attached is an unofficial English translation of the new guidelines for your convenience.

The purpose of these guidelines is to determine when, according to the position of the Israeli Tax Authority, investments through SAFE are considered an advance payment for shares meaning that this transaction will be classified as an equity event that generally does not trigger tax liability in Israel—rather than a liability event that may result in the recognition of interest income for tax purposes in Israel, which may lead to tax liability in Israel.

Key Points of the New Guidelines:

• The new guidelines apply to an investment amount per investor not exceeding USD 20 million, compared to NIS 40 million (approximately USD 11 million) in the previous guidelines.
• The new guidelines allow up to three tiers of discount rate at the time of share allocation, where the discount rate in each tier can be conditioned on the time elapsed since the investment or tied to achieving milestones.
• The status of SAFE investors has been clarified in cases where share allocation occurs within a company’s fundraising event, ensuring that at least 25% of the raised capital does not come from SAFE investors.
• The share allocation under the SAFE must occur, among others, during a capital raise defined in the SAFE as a "qualified raise." According to the Israel Tax Authority, this refers to a capital raise exceeding 40% of the company’s fully diluted share capital or more than 10 times the accumulated amount of the company’s open SAFEs. This clarifies the previous guidelines, which did not specify the definition of a capital raise.
• A reference has been added to cases where the share allocation date is predetermined. In such cases, the conversion must be at an agreed value or based on the last funding round, without a discount or with a pre-set fixed discount.

Senior Division Manager, Professional Division

January 29, 2025

To
The Israeli Advanced Technology Industries (IATI)
Ms. Karin Mayer-Rubinstein, CEO and President
89 Medinat HaYehudim, Herzliya

Guidelines Regarding the Tax Aspects Applicable to Investment in a
Company through SAFE – (Simple Agreement for Future Equity)

Further to your inquiry dated May 3, 2022, and our previous guidance dated May 16, 2023, I would like to clarify the Israel Tax Authority's position regarding the taxation method applicable to investment in a company through SAFE (Simple Agreement for Future Equity) as follows:

1. Background
In your inquiry, the Tax Authority was asked to examine the tax aspects arising from the allocation of shares in a private Israeli-resident company (hereinafter: the "Company") to an investor (hereinafter: the "Investor") and their realization by the Investor, received under a purchase agreement that includes a financial investment at a specific date (hereinafter: "Investment Date") in exchange for the allocation of shares only at a later date (hereinafter: "Allocation Date"), when the value of the shares to be allocated is higher than the financial investment amount (hereinafter: "SAFE Transaction" or "SAFE").

SAFE Transactions provide a quick and efficient means of raising capital for private companies, characterized, among other things, by the absence of an agreed-upon valuation. At the time of signing a SAFE Agreement between the Investor and the Company, capital is immediately transferred to the company by the investor (hereinafter: "Investment Date") [The definition appears twice in the original document], but the allocation of shares occurs at a later date. This delay allows the deferral of the valuation question until a more significant and broader capital raise takes place, in which a valuation is agreed upon with investors. The fundraising price will serve as a reliable estimate for determining the number of shares to be actually allocated to the Investor via the SAFE Transaction. During the period between the capital transfer and the share allocation, the invested capital does not bear interest, and there is no payment from the Company to the Investor. However, upon the allocation of shares, the Investor receives a discount on the share price compared to other investors in the broader fundraising.

Due to the difference between the number of shares actually received by an investor in a SAFE Transaction and the number of shares that could be acquired at market value (hereinafter: the "Difference" or the "Benefit"), which results from the change in the Company's market value between the Investment Date and the Allocation Date, the question arises whether this Difference also includes interest income for the SAFE investor or whether the transaction should be classified purely as an equity transaction.

2. SAFE Investment Framework as Presented in Your Inquiry

2.1. The profile of companies subject to this Tax Authority position, which utilize SAFE Transactions, is as follows:
2.1.1. The profile of companies subject to this Tax Authority position, which utilize SAFE Transactions, is as follows:
2.1.2. The Company operates in the high-tech industry.
2.1.3. The majority of the Company's expenses from its establishment until the SAFE Agreement signing date, or in the three years preceding the SAFE signing date (whichever is shorter), for which there is an audited financial report, are classified as expenses for research and development, production, or marketing of products developed by the company as part of its R&D activities.
2.1.4. At the time of signing the SAFE, the aforementioned research and development activity continued in the Company.
2.1.5. The primary value of the assets held by the Company, directly or indirectly, does not originate from the rights specified in Section 97(b)(2)(3) of the Ordinance.
2.1.6. The company has not conducted an equity fundraising based on a known share valuation within three months before the SAFE Agreement closing date.
2.2. The conditions of the SAFE Agreement under this position paper between the Investor and the Company are as follows:
2.2.1. The investment amount under the SAFE Agreement for a single investor, directly and/or indirectly, does not exceed $20 million USD.
2.2.2. The SAFE is subject to the Company's approval of the Investor's right to transfer their rights under the agreement to a third party until the allocation event, except for a permitted transferee specified in the SAFE.
2.2.3. The agreement between the parties is not labeled as a loan/debt agreement
2.2.4. The investment under the SAFE Agreement is intended exclusively for the allocation of shares (including "rights to shares"). The share allocation under the SAFE Agreement must occur solely according to the predetermined mechanism and must take place at the earliest of the following dates (hereinafter: "Share Allocation Date"):
2.2.4.1. Upon a qualified financing round, as defined in the SAFE, requiring¹ allocation²,
2.2.4.2. Upon a public offering on the stock exchange,
2.2.4.3. Upon an "exit event" where the majority of shareholders in the Company³ sell their shares,
2.2.4.4. As part of a transaction for the sale of most or all of the Company's assets,
2.2.4.5. On a pre-determined date specified in the SAFE Agreement.
2.2.5. The Investor has no right to a refund of his investment by the Company, other than through the allocation of the Company's shares, and no preagreed date has been set for such a refund, except in an event that is one of the following:
2.2.5.1. Sale of shares by most of the shareholders in the Company⁴ when the payment of consideration in the transaction is made by the buyer of the shares (a third party not related to the Company or a shareholder who does not hold more than 25% of the Company's shares) and not by the Company.
2.2.5.2. Voluntary liquidation / non-voluntary liquidation / appointment of a receiver or special manager appointed by the receiver, court, or enforcement officer / general assignment to creditors. In such an event, the SAFE instrument is subordinate in the order of priority relative to creditors of the Company, except in the case of liquidation, where the rights of SAFE Investors are like those of preferred shareholders, i.e. , subordinate to all debts and preferred over common shareholders.
2.2.6. The SAFE Agreement stipulates that if the Investor’s investment is refunded by the Company as mentioned in section 2.2.5 above, other than through an allocation of shares, then their entitlement is limited to the investment principal only and not beyond that. The SAFE does not obligate the Company towards the investor to provide compensation in money or its equivalent in the form of accrued interest, royalties, or any other instrument of compensation not associated with ownership of shares, during the period between the Investment Date and the Allocation Date.
2.2.7. The discount rate for the investor at the time of the allocation of shares as defined below, does not change as a function of the time elapsed between the Investment Date and the Allocation Date. However, in cases where the SAFE Agreement sets up to 3 levels displaying 3 discount rates, where the discount rate in each level may be conditioned on the passage of time or tied to the achievement of milestones, this will not constitute non compliance with this Section. It will be clarified that in the case of multiple discount levels, as mentioned above, the maximum discount rate will apply at most 3 years from the signing date of the SAFE Agreement.
2.2.8. In the case where the Share Allocation Date is set as a pre-determined date in the SAFE Agreement, the conversion is required to be according to an agreed-upon value (which is a fixed amount, or the share value in the last or next funding round with no discount or with a pre-set discount).
2.2.9. No liens / attachments have been placed on the Company's assets or guarantees, including subsidiaries or affiliated entities, for the Benefit of the Investor.
2.2.10. The Company will not require tax-deductible financing expenses or any other expense directly or indirectly related to the SAFE, whether in the form of financing costs, financing cost capitalization, or as a result of the revaluation of the obligation or in any other way.
2.3. Additional conditions related to the share allocation event and the realization of shares by the Investor within SAFE Transactions covered in this position paper:
2.3.1. If the share allocation occurs as part of a Company capital raise, at least
25% of the raised capital must come from non-SAFE investors⁵.
2.3.2. The sale of shares allocated under the SAFE Transaction (hereinafter: "Realization of Shares") must take place at least:
(a)
12 months from the SAFE Agreement signing date, or
(b)
9 months from the Share Allocation Event (hereinafter: "Date of Share Realization").
2.3.3. Not withstanding the above in section 2.3.2, the Date of Share Realization may be after a shorter period, insofar as the Date of Share Realization is part of a transaction or action described in sections 2.2.5.1 or 2.2.5.2 above⁶.
2.3.4. As part of the Realization of the Shares, the price received by the SAFE Investor is the same as the price received by shareholders of the same type (excluding the pre-set Benefit under the SAFE Agreement).

3. Israel Tax Authority Position on the Tax Classification of SAFE Investments as Detailed Above
3.1. If the conditions in Section 2 are met, the investment in the Company under aSAFE Transaction will be considered an advance payment for shares. Accordingly, the following provisions apply:
(a) No tax event occurs upon the allocation of shares to the Investor, and the company is not required to withhold tax at source.
(b) Any consideration received by the investor for realizing the shares will be regarded as "consideration for the sale of shares," provided the conditions in Sections 2.3.2 through 2.3.4 are met before the sale of the shares resulting from the SAFE conversion.
3.2. If, at the share allocation event, all the facts and conditions in Section 2 are not met, the transaction will be reviewed based on all circumstances. The classification will then be determined as an advance on shares, debt repayment including interest income for the investor, or another type of transaction. The tax liability will be determined accordingly by the assessing officer.
3.3.The classification of the SAFE as an advance on account of shares does not limit the tax assessor's authority to examine the classification of income from the sale of shares by the investor due to the investor's specific circumstances, such as being a director or employee of the company, classifying the transaction as a random transaction due to its commercial nature, and so on.
3.4. It will be explicitly clarified that the non-fulfillment of the aforementioned conditions does not determine the tax classification of other SAFE Agreements.
3.5. This position will apply to all SAFE Transactions meeting these conditions, signed or to be signed between companies and their investors from January 1, 2025, to December 31, 2026, or until other guidance is issued by the Israel Tax Authority, whichever comes first.

Best regards,
Amir Davidov, CPA

CC
Mr. Shay Aharonovitz – Director of the Israel Tax Authority
Mr. Hen Schreiber – President of the Institute of Certified Public Accountants
Mr. Yaron Gindi – President of the Tax Consultants Association
Mr. Amit Bechar – President of the Israel Bar Association
Mr. Tzvika Barel – Director of Division A, Multinational Corporate Taxation and
International Taxation, Professional Division
Mr. Avishai Diner – Director of the International Taxation Department, Professional Division
Mr. Tomer Gamzu – Director of the Capital Market Department, Professional Division
Mr. Karim Kanaan – Chief of Staff to the Director of the Tax Authority
Mr. Yonatan Azarzar – Professional Advisor to the Director of the Tax Authority