The local minimum tax regime (QDMTT) is a mechanism introduced by the OECD to combat base erosion and profit shifting (BEPS Program) by multinational corporations. The mechanism imposes a minimum tax rate of 15% on multinational groups meeting specific criteria.
Starting with the 2024 tax year, including EU members, have implemented this mechanism. The Israeli Ministry of finance announced in July 2024 that this tax regime also be implemented, taking effect starting the 2026 tax year.
Overview of the BEPS Program
In recent years, the OECD has been working through the BEPS program to prevent erosion tax and base shifting my multinational groups, which cause significant tax losses for many countries. The goal of the BEPS program is to identify and address key factors that lead to tax base erosion in countries that are members of the OECD.
The BEPS program includes 15 actions, each addressing a different aspect of multinational taxation activities. For example, digital economy taxation, controlled foreign corporations, permanent establishments, transfer pricing, etc.
Minimum corporate tax is part of Action One, which deals with taxing the digital economy. Action One includes two main pillars. The first pillar focuses on profits between different jurisdictions in which the multinational group operates. The second pillar oversees the taxation of multinational groups with annual revenue exceeding €750 million. The local minimum corporate tax mechanism is part of pillar 2.
What is Pillar Two?
The purpose of pillar two is to ensure that the multinational group pays effective tax that is not less than 15%, regardless of the jurisdiction they are in. This aims to stop the “race to the bottom” among countries in setting corporate tax rates.
Pillar 2 is composed of two main layers:
- Adjusting Domestic law– Adapting domestic legislation ensures that companies within multinational groups with annual revenues exceeding €750 million are subject to a minimum effective tax rate of 15% or higher. If a company’s tax rate within the group is lower, the residence country of the company will have the primary right to collect the difference to reach 15%.
- Additional Tax Collection– An additional tax will be imposed on the parent company or another company within the group based on the income of a group company paying an effective tax rate below 15%. This ensures that low tax payments by one company in the group have a ‘tax top-up’ by another company in the group.
According to the OECD rules, each country can choose the scope and method of adopting pillar two into its domestic law.
Minimum Corporate Tax in Israel
The state of Israel announced its participation in the pillars program as well as the planned structure for taxing the digital economy in 2021. At the end of July 2024, Finance Minister Bezalel Smotrich announced starting from the 2026 tax year, the minimum corporate tax regime in Israel will apply to residential Israeli companies that are part of multinational groups with annual revenue exceeding €750 million.
At this stage, it is recommended to delay the implementation of the second layer of pillar 2, and to revisit the issue after a period of implementing the local minimum corporate tax mechanism.
The corporate tax rate in Israel is already above 15%, therefore most companies will not be affected by this change. This update will mainly affect companies which benefit from the favorable tax regimes in Israel. For example, large technology companies that, under Capital Investment Law, are taxed at lower rates.
Implementing a minimum corporate tax in Isreal may cause these companies to reduce or even completely remove their activities in Israel and work in domestic jurisdictions with lower tax rates that have not yet adopted this mechanism. The Ministry of Finance faces a challenging task of balancing implementing the mechanism with maintaining Israel’s fiscal attractiveness.
Our firm specializes in Israeli and international taxation, providing our clients with comprehensive support in the field of international taxation. To contact a representative from our firm, click here.
