Comprehensive Reform of Taxation in Israel’s High-Tech Sector – Changes to Corporate and Employee Taxation

The Tax Authority’s Effort to Reduce Tax Uncertainty in Israel’s High-Tech Industry

On Sunday, November 2, 2025, the Ministry of Finance announced a comprehensive reform of taxation for the high-tech sector at a press conference. The reform was initiated jointly by the Ministry of Finance, the Israel Tax Authority (ITA), and the Israel Innovation Authority. Its main goal is to provide certainty for individuals and companies operating in the industry.

The reform addresses three areas: venture capital funds, high-tech companies and industry employees. This article focuses on the expected changes for companies and employees. To read about the changes related to venture capital fund taxation, click here.

The high-tech industry is Israel’s main growth engine. The authorities and the Ministry of Finance aim to preserve and enhance Israel’s attractiveness for these companies. The reform includes legislative changes and clarifications, as well as new ITA procedures. Some have already been published, while others are expected soon.

Changes in Corporate Taxation for High-Tech Companies

The changes in corporate taxation relate to two main areas. Mergers and acquisitions, and the operation of R&D centers in Israel.

Mergers and Acquisitions

Many acquisitions are carried out by merging the acquired company into the acquiring company’s corporate structure. Under Amendment 279 to the Tax Ordinance, published in early 2025, several relaxations were introduced to the conditions for executing tax-exempt mergers. The required size ratio between the acquiring and acquired companies was changed from 1:9 to 1:19, allowing the acquisition of smaller companies.

In addition, the portion of the transaction that shareholders can receive in cash increased from 40% to 49%. Shareholders may also sell the acquiring company’s shares immediately, without a waiting period of several years.

The ITA Commissioner stated that since the change took place, many companies have submitted merger applications under the new framework.

R&D Centers

Many companies operate in Israel through R&D centers. An R&D center is a company primarily engaged in providing research and development services to its foreign parent company (or another foreign group company). The payment received by the R&D center is based on a cost-plus method, meaning the payment equals its expenses plus a fixed profit margin. For example, if a 5% margin is set and relevant expenses are 100, the R&D center will receive 105 and retain a profit of 5.

In recent years, it has been argued that R&D centers generate a much greater share of the group’s profits than currently recognized. As a result, tax assessors have been reviewing whether the pricing method properly reflects their contribution. If the assessor determines that it does not, an assessment may be issued.

Such assessments increase the amount attributed to the Israeli R&D center. Either by setting higher profit margins or by shifting to a profit-split method, dividing the parent company’s profits between it and the R&D center. These changes increase the R&D center’s profits and its tax liability in Israel.

These discussions have created uncertainty among multinational companies operating in Israel. These companies operated under the assumption that they knew their expected tax liability. Tax assessments can now significantly alter that expectation. This uncertainty has raised concerns about continuing to operate in Israel, a situation the government seeks to avoid.

To address this, the ITA published a circular in February 2025, followed by the final version published on November 2^nd. The main points of the circular (subject to its conditions) are:

1. If a tax assessor wishes to issue an assessment to a company meeting the circular’s conditions, approval will be required from the Professional Division, the Deputy Commissioner for Planning and Economics, the ITA’s Professional Advisor, and the ITA Commissioner. The specific approvals depend on the case.
2. IP Exit from Israel- foreign companies acquiring Israeli firms often wish to transfer their intellectual property (IP) out of Israel. This raises valuation disputes. Under the circular, the ITA determines that, subject to compliance with its terms, the IP value will be up to 85% of the transaction value (less costs and additional payments). This eliminates claims of inflated valuations such as 120%. The company must apply to the Professional Division for approval and certainty. The division will confirm that, by the end of the seventh tax year following the transaction closing, the profit attribution method for R&D activity will remain cost-plus.
3. Private Tax Ruling- a company may request a ruling confirming that its R&D service pricing is at arm’s length. An Israeli company providing R&D services to a non-Israeli related party may apply to the Professional Division for approval.
4. Advance Pricing Agreements (APA)- if the foreign party is resident in a country with which Israel has a double taxation treaty, the Israeli company may request a bilateral or multilateral APA regarding its transfer pricing policy.

In his speech, the ITA Commissioner elaborated on the circular and clarified several issues. He explained that since rulings often take a long time, a time limit was introduced to encourage taxpayers to use this route. The ITA must respond within 180 days; if no response is provided by then, the company’s position will be automatically accepted.

The Commissioner also addressed additional topics:

1. Marketing Intangible under the Law for the Encouragement of Capital Investment– a tax assessor wishing to address marketing intangible issues under this law must obtain approval from the Professional Division Manager.
2. Pillar 2- in July 2024, the Ministry of Finance announced that starting in 2026, Israel will implement a global minimum corporate tax rate of 15%. The ITA is currently preparing clarifications on how this will affect industry companies.
3. The QSBS Issue under President Trump’s Tax Reform- the ITA will publish its position on this matter in the coming weeks.

Taxation of Israeli High-Tech Employees Returning to Israel

It is common in the high-tech industry for employees to relocate abroad for several years. In most cases, these employees hold stock options that may begin vesting while they are outside Israel. Currently, when they exercise the options after returning to Israel, they are taxed on the full amount, without considering the period spent abroad.

Accordingly, they are taxed at their marginal rate upon exercise (since these are not options under the capital gains track of Section 102 of the ITA). This situation has led many Israelis to delay their return until after exercising their options. To encourage Israelis to return sooner, the reform introduces significant changes. It offers two options to ease the tax burden:

1. Request to split the profit period between Israel and abroad, so that the portion vested abroad is not taxed in Israel.
2. Change the options track from employment income to capital gains, significantly reducing the tax liability.

Note: This does not apply to new immigrants or veteran returning residents, but only to Israelis who spent a few years abroad.

The tax reform introduces extensive changes to the taxation of the high-tech sector and demonstrates Israel’s commitment to the industry’s growth. It also reflects the government’s desire to attract and encourage investment in Israel and Israeli companies.

Nimrod Yaron & Co.- Israeli and International Taxation advises funds, high-tech companies, investors, and employees in the high-tech sector on tax planning tailored to their specific circumstances. To contact a representative from our firm, click here.

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