17 May, 2023

New ITA Guidelines on Taxation of SAFE Instruments

Following extensive discussions between the ITA and the Israeli Advanced Technology Industries (including partners from our firm) regarding taxation of SAFE (Simple Agreement for Future Equity) instruments, the ITA published on May 16, 2023, detailed guidelines regarding taxation of investments in companies through SAFEs and the required conditions in order to classify such SAFEs as capital instruments.

SAFE instruments, which have become increasingly popular over the years, allow companies to simplify the financing process by granting investors the right to invest in a company without setting a valuation for the company and to convert the SAFE into equity upon a future financing round when there is clarity on valuation. For the early investment, the investor is granted a certain discount under the SAFE, reflected in the higher number of shares issued to the SAFE investor upon a future financing round, when compared to the number of shares issued to other investors in accordance with the price per share of such round.

Such discount raises the question on whether the SAFE should be considered (i) as a capital instrument and the discount as an advanced payment for shares, or (ii) as an instrument similar to a convertible loan and the discount as a debt repayment or interest payment. To the extent the SAFE transaction is classified as debt repayment or interest payment, Israeli companies will be required to withhold taxes at source upon conversion of the SAFE into shares. Consequently, non-Israeli SAFE investors, which are generally entitled to an exemption from capital gain in Israel (under certain conditions) will not be entitled to an exemption on the discount component unless a relevant income tax treaty provides otherwise.

ITA’s guidelines include a detailed list of conditions which if fulfilled, will allow SAFE instruments to be classified as capital instruments and consequently:

  • Any consideration payable to a SAFE investor upon sale of the SAFE (or the shares underlying the SAFE) will be classified as payment for shares and subject to capital gain tax (which may be exempt for non-Israeli investors);
  • The conversion of the SAFE into shares will not be considered as a taxable event and the Israeli company will not be required to withhold taxes at source upon such conversion.


The following is a summary of the main conditions specified in the ITA guidelines:

  • The company is an Israeli resident company engaged in the Hi-Tech field.
  • Since the date of its incorporation and until the SAFE execution date, or during the three-year period prior to the SAFE execution date (the shorter period of the two), most of company’s expenses are classified as expenses for (i) R&D activity; or (ii) manufacturing or marketing of products developed within the R&D activity.
  • The company did not undergo a financing round during the three-month period prior to the SAFE execution date.
  • The SAFE amount does not exceed NIS 40 million (for one investor).
  • Conversion terms are predetermined within the SAFE instrument and the conversion occurs upon a financing round or an M&A/IPO event.
  • The SAFE does not include an interest component (or an obligation of the company to pay the investor a consideration which is similar in nature).
  • At the time of conversion of the SAFE, at least 25% of the amount raised by the company as part of the financing round does not derive from SAFE investors.


To the extent the conditions listed in ITA’s guidelines are not fulfilled, ITA has the right to examine the SAFE transaction and determine the applicable tax treatment.

In order to ensure compliance with ITA’s guidelines (which are valid until December 31, 2024, or until other instructions are published by the ITA) and safeguard the capital treatment of any SAFE investment, we recommend consulting with your tax advisor when drafting the SAFE instrument and reviewing any outstanding SAFE instruments. We note however that in case the terms and conditions of the ITA guidelines are not met, the SAFE may still qualify for capital gains treatment but such position may be challenged by ITA.

For further information please contact:

Adv. Tal Atsmon, Managing Partner, Co-Head of the Tax Department

Adv. Oren Biran, Co-Head of the Tax Department

Adv. Yaron Sever, Co-Head of the Tax Department

ITA Guidelines on taxation of SAFE instruments (in Hebrew) >

The content in this communication is provided for informational purposes only and is not intended to be comprehensive. It does not serve to replace professional legal advice required on a case by case basis. The firm does not undertake to update the information in this communication or its recipients about any normative, legal or other changes that may impact the subject matter of this communication.