Written by: Oz Halabi, Esq
The Israel Tax Authority (ITA) has issued today an updated tax guidance on investments through SAFE (Simple Agreement for Future Equity) agreements (the “2025 SAFE”). The 2025 SAFE framework introduces notable changes compared to the guidance issued in 2023 which expired on 12/31/2024 (the “2023 SAFE”). These changes impact investors, startups, and tax planning strategies. Below is a summary of the 2025 SAFE form followed by key differences compared to the SAFE 2023 framework.
Summary of 2025 SAFE
2025 SAFE clarifies and refines the tax treatment of investments made through SAFE agreements in Israeli companies. The ITA failed to address the tax treatment of Israeli holders of SAFE issued by a non-Israeli corporation.
The key aspects include:
• Investments via SAFE are considered equity transactions rather than loans or other debt instruments, provided such investments meet specified conditions. The conditions are substantially similar to the 2023 SAFE, and include the following:
o The issuer is an Israeli corporation.
o The issuer operates in the high-tech industry and most of its expenses, since its incorporation (or in the 3 years prior to the issuance of the SAFE) are considered “research and development” – issuers that failed to meet any of these conditions may approach the ITA for a pre-clarification.
o The issuer did not raise capital in a priced round in the period that is 3 months prior to the closing of the SAFE.
- The SAFE
o No holder can invest, directly or indirectly, more than $20m USD under a particular SAFE agreement. The 2023 SAFE limited this amount to 40m NIS (approximately $12m USD).
o The parties did not call the SAFE “Loan Agreement”
o The SAFE entitles the holder to shares (or right to shares) only (and not any other form of consideration, other than as provided below) and the conversion should occur only upon one of the following:
o The conversion can occur only pursuant to: - A “qualified financing,” as the term defines in the SAFE. In cases where share issuance occurs as part of an issuer’s capital raise, then at least 25% of the raised capital must originate from non-SAFE investors, “as such”.[1]
- Initial public offering of the issuer
- Sale or exchange of shares in which MAJORITY of the NUMBER of shareholders, and not number of shares. Option holders or shares received upon the exercise of options are not taken into account when calculating the NUMBER of shares sold
- Upon the sale of substantially all the assets of the issuer.
- On a date that is determined in the SAFE. If the SAFE allows for a conversion upon a certain date, the value on which the conversion would occur should be set as either a fixed value or the value of the last round or future round, without any discount. The 2023 SAFE did not include this conversion alternative.
o The discount on the SAFE does not change as a function of the time the SAFE is outstanding. However, if the SAFE includes up to 3 gradual discount rates where each such rate is determined based on time laps, or milestones achieved, then such SAFE will not, for that purpose only, be disqualified. The 2023 SAFE did not include this conversion alternative.The 2025 SAFE provides exemptions in which the SAFE will remain treated as equity even in case of payment of cash on account of the SAFE:
o Upon the sale by the MAJORITY of the shareholders, whether the payor is a third-party buyer or a shareholder holding less than 25% of the rights in the issuer. Redemption by the issuer is not allowed. This was not introduced in the 2023 SAFE.
o Pursuant to the liquidation and dissolution of the issuer
o The payment in cash should only be the principle of the SAFE and not any additional amount.
Sale of shares or cash received:
o The sale of shares issued under a SAFE agreement, must occur only after a minimum period of: (a) 12 months from the SAFE agreement signing date, or (b) 9 months from the date of share allocation (hereinafter: “Share Liquidation Date”). The liquidation period may be shorter if the share liquidation occurs as part of a transaction or event that is either (i) upon the sale of the MAJORITY of the shareholders, when the payor is a third-party buyer or a shareholder holding less than 25% of the rights in the issuer or (ii) pursuant to liquidation of the issuer.
o The price received by the holder must be equal to the price received by shareholders of the same class, excluding any pre-defined benefits specified in the SAFE agreement. - Israel Tax Authority’s Position on the Tax Classification of SAFE Investments
o If the conditions stated herein are met, the investment under a SAFE agreement will be considered advance payment for shares, and the following provisions will apply: - No taxable event will occur at the time of share issuance to the investor, and the company will not be subject to withholding tax.
- Any proceeds received by the investor from the sale of shares will be classified as “consideration for the sale of shares”.
Implications for Investors and Companies
The new 2025 SAFE framework introduces a stricter regulatory landscape, particularly concerning tax obligations and investor liabilities. It is crucial for businesses and investors engaging in SAFE agreements to reassess their tax strategies to ensure compliance and optimize tax efficiency.
Our firm is available to provide expert guidance on these changes and how they may affect your investments. If you have any questions or require a strategic review of your SAFE agreements, please do not hesitate to contact us.
