Israeli Tax Aspects regarding SAFE Agreements

Recently, the Israeli Tax Authority (ITA) published guidelines clarifying the Israeli the tax aspects relating to SAFE (Simple Agreement for Future Equity). The guidelines were published in response to a request from the Israeli Advanced Technology Industries (IATI) and following lengthy discussions between the IATI’s taxation team and the ITA, in which Dr. Eran Lempert the head of our tax department, also participated.
From a tax perspective the question at hand is whether an investment in a SAFE instrument should be classified as equity or debt. This classification will determine the tax treatment of the discount component to the investor at the time of the conversion.
In its publication the ITA determined a list of conditions, which if met, the SAFE investment will be considered as an equity instrument – i.e., a prepayment for shares. It is important to note that that SAFE agreements which do not meet the criteria specified in the guidelines may still be viewed as equity instruments based on the specific circumstances of the transaction.

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