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investors, on more investor-friendly terms and conditions. This has resulted in lower
management fees and carried interest, increased transparency and reporting, and
other arrangements designed to address conflicts of interest and better align the
interests of General Partners and investors.
Evolution in tax treatment
Generally, Israeli PE and VC funds may obtain a tax ruling from the Israeli Tax Authority
of the Israeli Ministry of Finance. Such a tax ruling would typically provide either a tax
reduction or a full exemption from tax on gains derived by non-Israeli investors from
the funds' investments in Israeli and Israeli-related companies. In order to qualify for
the benefits of such a ruling, a fund would be required to meet certain requirements,
relating generally to the composition of its investors, the manner in which it invests
and the types of investments it makes. Those conditions are generally consistent
with the manner in which "standard" Israeli funds investing in Israel typically operate.
Such tax rulings typically also address the taxation of carried interest by the general
partner, and a separate value added tax ruling may provide that VAT at a rate of zero
would apply to management fees and possibly also carried interest, with respect to
the proportional share attributable to non-Israeli investors. The terms of the tax and
VAT rulings continuously evolve throughout the years, but a more detailed discussion
of the trends is beyond the scope of this article.
Shifting regulatory environment
The European Alternative Investment Fund Managers Directive (AIFMD) regulations
and the regulations promulgated under the U.S. Dodd-Frank Wall Street Reform
and Consumer Protection Act, that preceded it, marked a trend of strengthening
regulatory oversight over private fund managers.
These regulations impose various registration requirements and stipulations on funds
interested in soliciting European or American investors, and on the use of finders
who are not registered broker dealers by funds soliciting American investors (and
by American funds soliciting investors anywhere in the world). These regulations not
only serve as a challenge for Israeli fund managers keen on soliciting European and
American investors with ease, but also serve as a contrast to the relatively simple
Israeli regulatory environment. The Israeli Securities Law, 1968 which regulates the
offer of securities to the public in Israel, and the Law of Investment Advice, Investment
Marketing and Investment Portfolio Management, 1995, which regulates the provision
of investment counseling, marketing and portfolio management services in Israel,
generally provide that no additional registration of the offering, or registration of the
fund manager as an investment advisor is required, if the fund meets the relevant
limitations with respect to conducting a private offering and, where needed, only
offers interests to "qualified clients".
The speed at which significant changes in the global marketplace are currently taking
place is unprecedented, and perhaps the most pronounced trend of all – its impact
manifesting itself in the shifting dynamic between management teams and investors,
the evolution of investment terms and strategies, and in the tax and regulatory arena.
In this ever-changing environment, a dynamic and comprehensive perspective is key
to navigating these challenges.