Comprehensive Reform of Taxation in Israel’s High-Tech Sector – Changes to the Taxation of Venture Capital Funds

The Tax Authority’s Attempt to Combat Tax Uncertainty in Israel’s High-Tech

On November 2, 2025, the Ministry of Finance, together with the Tax Authority and the Innovation Authority, announced a comprehensive reform of taxation. The reform aims to provide certainty and preserve and improve Israel’s competitiveness for the high-tech industry. The reform addresses three dimensions, venture capital funds, high-tech companies, and industry employees. This article focuses on the expected changes in venture capital fund taxation. To read about the expected changes for companies and industry employees, click here.

The high-tech industry is a central growth engine in Israel. Venture capital funds are the main investors in the industry. The funds enable young, high-risk companies to raise capital and continue expanding their operations. Therefore, to maintain industry growth, it is important to encourage and facilitate venture capital fund activity in Israel.

Venture capital funds entered Israel in the 1990s. Despite their presence in Israel, they had no certainty regarding their taxation. Thus, fund investors, including foreign investors seeking this certainty, had to approach the Tax Authority. The approach is through rulings- an expensive and lengthy process.

For the first time, as part of the reform of taxation and to encourage investment in Israel, the taxation of venture capital funds is being regulated. This is through new legislation and regulations expected to be published by the end of 2025. The changes address the taxation of the General Partner (GP) and the Limited Partner (LP).

Changes in General Partner (GP) Taxation in Venture Capital Funds

The General Partner in a venture capital fund is essentially the partner managing the fund. The new reform distinguishes between an Israeli resident General Partner and a foreign resident General Partner.

Until now, the taxation of carried interest for an Israeli resident General Partner depended on the identity and composition of investors. The tax ranged from 25% to 50%. The more exempt/foreign investors, the lower the taxation. This created a preference for foreign capital over local capital.

To correct this, under the reform, carried interest taxation will not depend on investor identity. It will stand at 27%. Additionally, carried interest will be classified as income from personal exertion. This means the surtax rate applied will be the lower rate, which stands at 3% for 2025. Furthermore, VAT on carried interest has been canceled.

It is very common for investors to require skin in the game from the General Partner. This means they also invest alongside them, typically in single-digit percentages. Without a ruling, this investment was taxed at full marginal tax. The presented change is to treat profits from this skin in the game (if invested up to 10%) as capital gains taxed at 10%.

A foreign resident GP was taxed at 15% on carried interest. This tax has been reduced to 10%. VAT on carried interest for the foreign resident GP will also be canceled. Skin in the game will also be considered capital gains for them. According to Section 97(b3), will be exempt from tax in Israel.

Changes in Limited Partner (LP) Taxation in Venture Capital Funds

Limited Partners in a venture capital fund are passive investors. The reform distinguishes between an Israeli resident Limited Partner and a foreign Limited Partner.

Passive investments by an Israeli resident Limited Partner, without a ruling, were taxed as business income. Under the reform, if the investment is in an Israeli resident technology company, regardless of the investment method (through a fund, directly, etc.), the profit will be taxed as capital gains.

A foreign resident LP sometimes faced claims of permanent establishment and classification of activity as active. Under the reform, like an Israeli LP, the profit will be viewed as capital gains. It will be exempt from tax in Israel.

Comparison of Tax Rates Before and After the Reform

*The numbers presented in this table refer to situations where no ruling was obtained.

For further reading on current venture capital fund taxation, click here.

The tax reform presents extensive changes in high-tech industry taxation. It demonstrates the State of Israel’s commitment to high-tech industry growth. It also shows the desire to attract and encourage investments in Israel and Israeli companies. Its significant advantage is the certainty it provides. Under the reform, there will be no need to apply for a lengthy and expensive ruling. Instead, they will know directly what the relevant taxation is.

Nimrod Yaron & Co. – Israeli and International Taxation, accompanies companies, funds, investors, and employees in the high-tech industry. We provide comprehensive solutions to their relevant tax issues. To contact a representative from our firm, click here.

FAQ