The Israel Tax Authority (ITA) published new guidelines that further clarify the taxation rules surrounding investments made through Simple Agreements for Future Equity agreements (SAFEs) last week.
These guidelines are designed to address changes in the market and provide greater clarity to both investors and companies. They come after the expiration of the previous directive originally issued on May 16, 2023, which expired on December 31, 2024.
In recent years, SAFEs have become a popular method for startups to raise capital without the immediate need to issue equity. ITA has been closely monitoring these transactions and their potential tax implications.
The updated SAFE guidelines from the ITA provide critical updates and clarifications for investors and companies navigating the landscape of startup funding. These changes aim to offer more flexibility, allowing for larger investments, more structured conversions, and greater clarity on discount mechanisms.
As companies adapt to these new guidelines, it will be essential to ensure that all agreements signed from January 1, 2025, onwards comply with the updated regulations to avoid any tax complications in the future.
The updated guidelines will apply to all SAFE transactions signed between companies and investors from January 1, 2025, through December 31, 2026.
If a new directive is issued by the ITA before that time, the guidelines will be superseded. Companies and investors who entered into SAFE agreements prior to January 1, 2025, can also refer to the updated guidance, which may be used to clarify the provisions of the previous guidance.
Key Updates in the New Guidelines
The new guidelines build on the previous rules, with both clarifications and new provisions.
Below is a non-exhaustive list of the key updates in the revised guidance:
Increased Investment Limit for SAFE Transactions
The maximum permitted investment under a SAFE agreement has been significantly increased. Previously, the threshold was set at ILS 40 million. Under the updated guidelines, the cap has been raised to USD 20 million.
This change expands the scope for larger investments, allowing high-net-worth individuals or institutional investors to participate without losing the tax advantages provided by SAFE agreements. However, investments exceeding this amount will not benefit from the same tax relief.
Mandatory SAFE Conversion Triggered by Financing Rounds
The updated guidelines clarify the conditions under which a SAFE agreement must convert into equity. Specifically, if a financing round raises an amount that exceeds either 40% of the company’s fully diluted share capital or 10 times the total value of the company's outstanding SAFEs, it is considered an equity financing event which triggers a mandatory conversion of the SAFE into shares of the company.
New Option for Pre-Determined Conversion Dates
The revised guidelines introduce a more flexible structure for the conversion of SAFEs into shares. In previous guidance, one of the conversion options was that the conversion was to take place according to the last fundraising valuation without any discount. However, the new guidance allows for a pre-determined conversion date specified in the SAFE agreement.
This conversion can either be based on an agreed-upon valuation (fixed amount or based on the next or last fundraising round, with or without a discount). This option provides greater flexibility for both investors and companies in structuring their SAFE agreements.
Discount Tiers – Clarification on Time-Based and Milestone-Based Discounts
The previous guidance set limits on the use of discounts, particularly emphasizing that discount rates should not vary linearly over time. Under the new guidance, the ITA has provided additional clarity regarding discount structures. It is now explicitly stated that a SAFE agreement may include up to three discount tiers, which could vary based on time or specific milestones achieved.
This is an important clarification for companies that wish to incentivize early investors while ensuring compliance with the ITA's rules. However, the guidelines also make clear 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.
Ofir Levy is a leading partner in the tax department at Arnon, Tadmor-Levy Law Firm. Ofir Paz is apartner in the same department.
