There's a handful of initial coin offering (ICO) issuers working out of Tel Aviv, Israel, but they typically domicile elsewhere.

That's not particularly helpful for the government since it loses out, not only on tax revenue, but also opportunities to market Israel as a place to do business.

And according to some, the Israel Tax Authority's (ITA) draft circular, published last week, detailing how domestic companies' ICO revenue could be taxed, is an effort by the Israeli government to entice token issuers to stay on the Middle Eastern soil.

"Up until now all Israeli ICOs ran the ICO from either Switzerland or Gibraltar," said Uriel Peled, a co-founder of two Israeli crypto startups. Both countries are known as business-friendly tax havens.

In Peled's eyes, the ITA is taking steps to legitimize the business of companies financed by ICOs, in an effort to make the country just as attractive. (The ITA did not respond to request for comment from CoinDesk delivered through a third party.)

CoinDash, Matchpool and Kik, all of whose teams fully or partly work in Israel, have moved their bases outside the country. Plus, Sirin Labs, which raised $157 million in an ICO recently, is largely based in Tel Aviv, but its website shows a company address in Switzerland.

One of the main reasons the ITA's circular might be appealing to token issuers is that it describes deferrals on when ICO income would become taxable, plus it mentions the potential for crypto companies to earn special tax treatment.

As such, according to Peled, the industry will see more companies officially operating from Israel this year, although he declined to give any specific names. One of his startups, a consultancy called CoinTree, is encouraging clients to consider an Israeli address.

Pointing to what he sees as an advantage to working in a country that is trying to move cryptocurrency out of a gray area, Peled told CoinDesk:

Global consulting giant Deloitte helped the ITA craft the circular, providing extensive feedback by invitation, according to Yitzchak Chikorel of Deloitte's international taxation team.

Chikorel and others were able to convince the authority that drawing distinctions between different crypto tokens – whether it be the original currency tokens, such as bitcoin; crypto tokens created to fund the building of a platform that the coins will be used to access in the future; or crypto tokens that act as equity – would be key to writing successful regulation.

"The main focus is the utility coins which are also in the heart of the tax circular," Chikorel told CoinDesk. "Our main focus was to tie a direct and clear line between the technology to the tokens, arguing they are connected one to each other in an inseparable tie."

Plus, the circular makes it clear that income will not automatically be taxed when it is first received.

Chikorel likened this to a gift card purchase – in many places around the world, income from a gift card purchase doesn't become taxable until someone spends the amount on the gift card, and the company can actually determine how much profit it realized.

Similarly, as people start to spend the tokens bought in an ICO to purchase items on a new platform, the company will then calculate how much profit it made after it built the software and acquired customers.

The circular also acknowledges that blockchain-based companies could apply for further tax advantages under Israel's Encouragement of Capital Investment Law, which was broadly designed to attract and retain high-tech companies.

Chikorel said he's pretty confident such applications would be accepted, telling CoinDesk:

Having said that, others aren't so sure that tax laws will persuade Israeli companies to bring their ICO income home.

First of all, cryptocurrency entrepreneurs, mirroring some of the anti-establishment sentiment of the industry as a whole, have not typically viewed regulatory actions as comforting, even though many say these kinds of moves legitimize the industry.

"Currently, I'm unaware of any Israeli company who did, or plans to do, an ICO under Israeli jurisdiction," said Lior Jaffe, co-founder of Jelurida, the Israeli startup behind blockchain platforms Nxt and Ardor. "And these regulations, if accepted, pretty much ensure that this will stay this way."

Secondly, taxes are just part of the regulatory landscape, and the Israel Securities Authority (ISA), which regulates securities in the country, has yet to formally rule on how ICO tokens should be categorized. However, in September, it established a committee to look into the actions taken by other securities regulators around the world and decide on whether it should consider ICOs part of its purview.

Not many countries' securities regulators have set hard-and-fast definitions for ICO tokens. The U.S. Securities and Exchange Commission chairman has stated that most projects he's reviewed appear to be securities, and has moved to prosecute several ICO founders. Russia has been more decisive and China outright banned ICOs.

Possibly hinting at tighter rules, the head of the ISA, Shmuel Hauser, said the regulator will seek to ban any company that has major involvement in bitcoin trading from listing on the Tel Aviv Stock Exchange (TASE).

Yet, as a small country lacking a global financial hub (like London or New York), Jaffe argued, Israel should go out of its way to keep its domestic high-tech companies local.

"The only practical way to achieve this is to announce that all revenues from ICOs are considered an investment and therefore exempt from taxes for a period of several years," he contended, adding:

Jaffa and Tel Aviv image via Shutterstock