Israel’s Tech Tax Reforms
Israel has introduced a sweeping reform to its tax framework for the high-tech and venture capital sectors, aiming to clarify rules around fund management, IP valuation, and incentives for returning talent.
We asked IsraelDesks members to offer their superstar analysis of the changes, which are designed to strengthen Israel’s position as a global innovation hub while ensuring greater transparency and competitiveness for international investors.
Removing barriers, reducing uncertainty
A central theme of the reform is certainty – especially for multinationals and cross-border investors, who previously had to navigate a patchwork of rulings and informal practices. “The reform provides regulatory certainty and beneficial tax treatment to the major players in the Israeli high-tech ecosystem, including giant multinational companies, venture capital funds and other types of tech investors in the Israeli technology market, and tech workforce talent,” says Meir Linzen, Chairman of Herzog Fox & Neeman (“Herzog”), and head of its Tax, Private Client, Gaming & Gambling Departments.
One of the reform’s key aspects: clarification of how income is attributed to Israeli R&D centers.
“A recent publication by the Israel Tax Authority (ITA) provides multinational companies active in the sector with clear rules on the income attributed to their Israeli R&D centers, often employing thousands of engineers in Israel,” adds Dr. Yuval Navot, head of Herzog’s Corporate Tax Department. “The publication clarifies that the income attributed to Israel will be subject to the ‘cost-plus’ method and that the ITA will not be inclined to treat Israeli R&D centers as profit centers for multinational enterprises, which would otherwise require that centers’ operations be recognized as part of enterprises’ net profit.”
This clearer framework reduces the risk of reclassification disputes and gives multinationals a more predictable view of their long-term tax exposure in Israel.
From a broader policy perspective, Dr. Eran Lempert, head of the Tax Department at Erdinast, Ben Nathan, Toledano & Co. suggests these changes are part of a deliberate shift. “Recent developments indicate that the Israeli government is actively replacing areas of ambiguity in its tax regime with greater certainty aligned to international standards,” he says. “The draft regulations published as part of the proposed tax reform seek to codify the preferential treatment historically available to foreign investors, enabling transaction parties to assess tax outcomes upfront rather than relying on tailored and often difficult to obtain – pre-rulings from the Israel Tax Authority.”
He adds that “the ITA’s new R&D circular formalizes transfer-pricing parameters and provides a clearer framework for asset and IP acquisitions, as well as for the structuring and operation of post-transaction R&D centers. Collectively, these measures reduce deal-execution risk, shrink the tax cushion typically built into pricing, and enhance the predictability of post-closing operations for multinational groups.”
“Revolutionary for global funds”
The reform also targets one of the long-standing friction points for global investors: having to contend with bespoke pre-rulings and complex structures to secure favorable tax treatment.
Miri Bickel, head of the Tax Department at Shibolet, explains just how significant this is for venture capital funds, many of which had previously sat on the sidelines: “The reform is revolutionary for global funds,” she points out. “The fixed tax treatment and VAT exemptions eliminate the need for complex structures designed to optimize tax treatment between Israeli and foreign investors, which is a fundamental change that opens the Israeli market to many funds that had previously refrained from investing due to the lengthy and burdensome bureaucratic process. Funds that did not meet the strict pre-ruling criteria or simply did not wish to engage in a process that could take long months (at best) can now invest in Israel immediately and automatically enjoy tax benefits. This allows funds to focus on identifying and executing investments rather than on complex tax structuring and administrative hurdles.”
Guy Katz, senior partner at Herzog, notes that “the proposed regulations suggest codifying tax exemptions for limited investors on capital gains, interest, and dividends earned on investments in technology companies. The Israeli managing partners in these funds (the GP) are entitled to a reduced tax rate (27%) on the carried interest. Non-Israeli managing partners are also subject to preferential taxation on their carried interest from Israeli exits, and in cases where they are subject to tax in Israel, such tax will be capped at 10%.”
Widens the tax exemption to non-Israeli tech investors
The proposed legislation widens the tax exemption to non-Israeli tech investors, like corporate VCs, angel investors, and family offices. “The exemption applies even where investors have a so-called permanent establishment in Israel, such as an office in Israel managing these investments,” Herzog’s Katz adds.
Shibolet’s Bickel explains: “The capital gains tax exemption for direct investments makes it more attractive for institutional investors and companies to invest directly in Israeli high-tech companies, without the need to establish fund structures. The fixed formulas for calculating VAT on management fees based on the ratio between foreign and Israeli investors provide financial predictability and enable more accurate economic planning.”
More M&A flexibility for tech companies
On the corporate side, the reform removes obstacles that previously constrained growth through mergers and acquisitions.
“For technology companies, the new legislation regarding structural changes has already been approved, effectively removing significant barriers for investments and growth through acquisitions,” says Shibolet’s Bickel. “This is a major change that enables transactions and exits in circumstances where the corporate structure previously made them impossible, allowing it to act with much greater flexibility. Israeli companies can now offer a more attractive corporate structure to investors and grow more organically by acquiring other companies.”
Additionally, she highlights what the reform means for exits and cross-border deals: “Clear guidelines on intellectual property valuation and transfer pricing methods significantly reduce uncertainty in exit scenarios involving multinational buyers, allowing companies and their investors to better plan their exit strategies and understand their expected tax liabilities in advance. The ability to obtain pre-rulings on transfer pricing enables multinational corporations operating R&D centers in Israel to structure their operations with full confidence in their tax position, encouraging long-term investment and expansion in Israel. The simplified M&A processes encourage Israeli companies to grow through mergers, creating larger and more competitive players in both the local and global markets.”
Welcome home
The Government of Israel has released draft resolutions tied to the 2026 state budget, including a proposal titled “Encouraging Aliyah and Return to Israel through Tax Benefits.” The measure would grant a temporary tax exemption to individuals who become Israeli residents for the first time in 2026, as well as to veteran returning residents.The reform is also aimed at Israelis abroad who might otherwise hesitate to return because of unclear or punitive tax treatment of their equity compensation. Historically, professionals working abroad and holding stock options or RSUs often faced uncertainty regarding their tax obligations upon returning to Israel. But that’s all changing now.
Daniel Paserman, head of Tax Department at Gornitzky GNY, together with fellow partner Adi Haya Raban, authored a key update explaining the proposal: “According to the proposal, an individual who immigrates to Israel during 2026 (and during that year only) and qualifies as a “first-time resident” or a “veteran returning resident” (i.e., an individual who has been a foreign resident for ten consecutive years prior to returning to Israel) (collectively, “Eligible Individuals”), will be entitled to an exemption on Israeli-sourced earned income as follows: for 2026–2027, up to NIS 1,000,000; for 2028, up to NIS 600,000; for 2029, up to NIS 350,000; for 2030, up to NIS 150,000. Israeli-sourced earned income exceeding the above exemption thresholds will be taxable in Israel, but will enjoy the lower progressive tax brackets applicable to earned income, as well as standard personal tax credits and deductions.”
“For returning professionals, determining clear guidelines for allocating equity-based income between Israel and abroad provides significant certainty and removes one of the main barriers to returning to Israel,” says Vered Meller, partner in the Tax Department at Shibolet. “Until now, professionals who worked abroad and held stock options or RSUs often faced uncertainty regarding their tax obligations upon returning. The exemption from tax on income generated and accrued outside of Israel eliminates concerns about double taxation and clarifies that Israel will not tax income earned during periods of non-residency.”
“This represents a significant shift that eliminates a major disincentive to returning home,” they continue. “The mechanism for crediting foreign taxes paid on income also taxable in Israel prevents double taxation and ensures that professionals will not pay tax twice on the same income. The creation of a ‘green tax track’ for transitioning from Section 3(i) equity compensation taxation to Section 102 simplifies the return process and removes obstacles that previously discouraged relocation. The anticipated legislation to enhance certainty in determining tax residency based solely on the number of days spent in Israel creates certainty regarding the determination of residency and stability in governmental policy. Individuals will receive certainty regarding their tax residency status.”
Navot (Herzog), adds: “For returning Israelis and new immigrants in the tech sector, the improved stock-option regime financially facilitates relocation by removing regulatory barriers.”
“A new business environment”
Taken together, the reforms signal that Israel is deliberately recalibrating its tax regime for a more competitive, more predictable, globally integrated high-tech economy.
Shibolet’s Meller says the reform “creates a new business environment in which decision-making is accelerated due to reduced uncertainty and the removal of bureaucratic barriers, transaction costs are lowered through simplified procedures and clear guidelines, Israel’s competitive position strengthens compared to other leading global high-tech hubs, and long-term planning becomes feasible thanks to predictable tax treatment throughout the corporate lifecycle.”
Lempert (EBN) notes these changes “reduce deal-execution risk, shrink the tax cushion typically built into pricing, and enhance the predictability of post-closing operations for multinational groups,” adding that they “signal a deliberate shift toward a more transparent and investment-friendly tax environment in Israel.”
Herzog’s Linzen says the practical impact is clear: reduced friction and uncertainty, making Israel a more attractive base of operations. “The reform reflects a broader move toward increased certainty and clearer technical guidance,” he argues. “The draft regulations issued by the Ministry of Finance, along with the ITA’s circulars and position papers, indicate an effort to formalize methodologies in areas that often involve inconsistent treatment in matters such as profit attribution, IP valuation, and capital gains tax exemptions.”
The prowess of Israel’s tech sector is widely recognized across the globe. The certainty and clarity this tax reform provides might be one of its biggest innovations yet.
