Tax Incentives for Impact Investment

The intensity and range of social problems in the 21st century, together with increasingly limited budgetary resources, require governments worldwide to search for innovative and creative ways to finance solutions. This study was conducted in light of this challenge, and includes in-depth reviews of the actions of the United Kingdom and the United States in the field of tax incentives and special legislation for impact investments. Then, the study turns to the practical issue of encouraging impact investments and building social capital market in Israel, and offers a potential solution appropriate for Israel, in the form of a tax incentive.

The development of social capital market in Israel would be a quantum leap in terms of the country’s ability to deal with social problems. Activity based solely on philanthropic donations is insufficient, and therefore social investments are necessary. Similar to start-up investments, impact investments are characterized by high risk and low yield compared to their risk profile, which means investors are often hesitant to invest in this type of product, despite the important prospect of a social return. Providing an impact investment tax incentive will increase the profitability of social investment for the investor, and consequently will help to increase the resources available for addressing social issues. The impact investment tax incentive reduces the cost of borrowing for social enterprises, and minimizes the competitive disadvantage resulting from the obligation to promote social goals at the expense of maximizing profits.

The proposed tax incentive to encourage social investments should be implemented by adding an amendment to the Angels’ Law (2011), and would include tax incentive for all types of impact investors and for all types of impact investments. The tax incentive should be given for both equity and debt investments in social enterprises, in order to allow for an increase in the financial resources available to projects with a well-defined social return without discriminating between different types of investments.

The Angels’ law has already provided an appropriate solution for encouraging a certain type of impact investment, and the use of an existing mechanism, which is recognized by the tax authority, will simplify the process of implementation and operation of the new tax credit tool. The tax incentive will be granted only to investors who have committed impact investment priorities, which must be recognized and regulated by the Israeli Corporations Authority and subject to government legislation that will be determined and published in advance. In sum, there is a need for legislation dedicated to the issue impact investment tax incentives, as has been done in different ways in England and the United States, and a tax credit structured to provide that incentive is the most realistic and sustainable solution.

Shiran Vaknin
Shiran interned in the Finance and  Development Department at the Israel Tax Authority. Prior to joining the Milken Fellows Program, Vaknin worked as a lecturer and teacher assistant in economics at the Ben-Gurion University, The College of Management and Ashkelon Academic College....
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