The Israeli Ministry of Finance, the Tax Authority, and the Israel Innovation Authority have jointly announced a sweeping reform package designed to redefine the fiscal landscape of the local high-tech industry. Presented today by Finance Minister Bezalel Smotrich, this initiative aims to remove regulatory barriers, enhance tax certainty, and streamline bureaucratic procedures for companies ranging from early-stage startups to multinational corporations.
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For investors, fund managers, and high-tech professionals considering a return to Israel, this reform represents a significant shift in policy, aligning Israel’s tax regime with global standards and addressing long-standing friction points.
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The Strategic Goal: Certainty and Growth

The reform was formulated by a joint team of government bodies and industry representatives to address specific challenges in the ecosystem. As Tax Authority Director Shay Aharonovich noted, the state recognizes high-tech as the economy's primary growth engine. The new measures are designed to create a stable, transparent tax environment that supports the expansion of existing investments and the attraction of new capital.
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Key Pillars of the Reform

The reform addresses three critical sectors of the high-tech ecosystem: Venture Capital, Multinational Activity (M&A), and Human Capital (Relocation).
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1. Venture Capital and Investment Funds

To encourage capital flow, the reform introduces significant tax reliefs for funds and direct investors:

• Carried Interest: Establishment of a uniform income tax rate on carried interest for both Israeli and foreign investment funds, alongside a VAT exemption on carried interest for both investor classes.
• Direct Foreign Investment: A capital gains tax exemption for foreign entities on direct high-tech investments, regardless of whether they have other operations in Israel.
• VAT Certainty: A fixed formula for calculating VAT on management fees, based on the ratio between foreign and Israeli investors in the fund.
• Passive Classification: Investment by Israeli investors in venture capital funds will be classified as passive investment, simplifying tax reporting.
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2. Multinationals and M&A

Recognizing the friction often involved in the acquisition of Israeli companies, the reform aims to smooth the path for M&A and the operation of R&D centers:

• Valuation Certainty: Establishment of clear guiding principles for determining the value of Intellectual Property (IP) and pricing methods for R&D centers (Transfer Pricing).
• Pre-Ruling Track: A new track for obtaining preliminary approval from the Tax Authority regarding pricing method models, providing upfront certainty regarding expected tax liabilities in Israel.
• Global Alignment: Adoption of the OECD’s Pillar 2 rules and the unified global minimum tax model (QDMTT), ensuring Israel remains competitive in the international tax arena.
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3. Returning Talent (Relocation)

Perhaps the most personal aspect of the reform targets the "Brain Drain," offering incentives for Israeli tech professionals to return home:

• Equity Allocation Rules: New guidelines for allocating income from equity-based compensation (stock options) between the period spent in Israel and abroad.
• Foreign Income Exemption: Granting a tax exemption on income generated and accrued outside Israel for returning residents.
• Foreign Tax Credit: Establishment of a clear mechanism for crediting foreign taxes paid on income that is also taxable in Israel.
• Section 102 "Green Track": A simplified path for transitioning from capital compensation taxation under Section 3(i) to the more favorable Section 102 of the Ordinance.
• Residency Definition: The promotion of legislation to determine tax residency based strictly on the number of days spent in Israel, replacing the complex and subjective "center of life" test.
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Summary

This reform signals a mature approach by the Israeli regulator. By moving from complex, case-by-case scrutiny to broad, transparent rules—particularly regarding IP valuation and residency definitions—Israel is positioning itself not just as a hub of technological innovation, but as a jurisdiction where it is "easy, predictable, and worthwhile to do business," as stated by Dror Bin, CEO of the Innovation Authority.
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We will continue to monitor the legislative progress of these proposals and their practical implementation by the Tax Authority.

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